Part 3 of 3
Since the installation of first transatlantic undersea cable, trading technology providers were tasked with simple mandates:
- Deliver information faster, from as many sources as possible and help investors and market operators to make better decisions and implement them quickly.
Fast forward to 2021 and the imperative for financial services firms of all ilk has moved away from just raw speed and toward the systematisation of trading decisions and the industrialisation of their implementation. Moreover, banks are still engaged in a struggle to regain competitiveness and bring down the cost / income ratios of their trading businesses. Therefore, the drive for automation and for the optimal allocation of human capital to the most value-added tasks now extends to all phases of the trading and client lifecycles.
This imperative – borne out of mounting regulatory constraints in the wake of the financial crisis – created an opportunity for technology vendors to alter their approach to systems architecture such that expenditure on both trading desk personnel and corresponding technology resources can be constrained or unleashed at will. Herein, the belief is that trading systems must be designed to preserve the ability of human traders to manually intervene in the operations of complex, automated execution programs when they deem it necessary to do so on either a pre-trade or at-trade basis, and that there is no other more optimal arrangement of functional capability – but, there is.
In this series of articles – produced in partnership with Itiviti Group – capital markets consultancy GreySpark Partners explores the current dynamics of the long-running debate over the dominance of high-touch versus low-touch trading systems design, arguing that the distinction between the two types is no longer necessarily relevant from an end-user perspective.
The Ideal, Non-functional Attributes of a Cross-asset E-trading Vendor Solution
For any trading business seeking to streamline its existing deployment of client-facing technology assets, realising that cost-cutting exercises can result in the realignment of the historical business model such that the human traders working within it can do more with more as opposed to more with less is no small undertaking. Trading technology systems needs must be prioritised so that the business can allocate the capital linked to them intelligently, and reliance must inevitably be placed on third-party technology vendor to provide solutions that bridge the gap between R&D spending and decision-making processes.
Understanding these challenges, technology vendors now increasingly adapt to these complex consumer needs accordingly by adopting an ‘outsourced innovation’ approach to new products development. Since 2018, GreySpark observed three such approaches by technology vendor companies that yielded varying degrees of success. Specifically:
- Buy & Build Modularity – An optimal approach for especially capital-constrained trading businesses as it ensures delivery of a fully functional trading platform for the business and, in many cases, its clients from the initial time of the product’s development;
- Asset Class Agnosticism – For larger or more technically sophisticated trading businesses, this data capture- and management-centric approach to product design results in systems builds that are functionally agnostic to the areas of the trade lifecycle value chain because of how data is handled within them; and
- Fully Automated Trading Activities – For the most technologically innovative and well-capitalised trading businesses, this fundamentally operations management platform-centric approach to product design promotes a democratisation and de-siloisation of the wealth of information created by clients that can then be recycled by the business for real-time intelligence analytics purposes (see Part 02 of this series of articles).
From a practical perspective, the outcome of those three approaches to outsourced innovation typically results in the creation of a trading platform capable of providing both buyside firm or sellside institution users with the ability to seamlessly integrate market and trade data connectivity with automated order and execution management functionality. Arguably, then, the resulting platform is typically one that is optimised for use in the cross-asset or cross-product e-trading arena.
To explore this hypothesis, GreySpark surveyed nine leading cross-asset e-trading third-party technology vendor solutions in Q1 2021 to assess the functional capabilities depth of their respective, specialised cross-asset e-trading products across three non-functional attributes:
- Analytics-based Trading – In the pre-trade or at-trade phases of the trade lifecycle, the presence in a cross-asset e-trading solution of components, modules or toolkits that can analyse large volumes of incoming or outbound trade, market or tick data and can then proceed to automatically process to the trader only the information that is necessary to adequately inform a pre-programmed order or execution management decision-making process. These components / modules / toolkits include simplified graphical user interfaces (GUIs) that represent the relevant datapoints in a fashion that is not reliant on a grid or tabular display and can, ideally, be viewed on only one screen.
- Front-office-to-Back-office Operational Coverage – In the pre-trade or post-trade phases of the trade lifecycle, the presence in a cross-asset e-trading solution of AI or machine learning software or toolkits that enhance business insight and business intelligence by creating transparency around manual processes – for example, client onboarding or FIX connectivity certification – such that the time-to-market for new end-investor clients or the ability to recycle the P&L of closed positions just-in-time into new positions is dramatically reduced.
- ‘The Platform Concept’ – In the at-trade phase of the trade lifecycle, the ability of select components, modules or toolkits within a vendor-provided cross-asset e-trading solution to seamlessly integrate with key elements of an in-house built trading businesses cross-asset or multi-asset technology stack in an asset class-agnostic fashion in such a way that, through their integration, the vendor-provided components automate as much of the immediate pre- and immediate post-trade processes and workflows as possible. The outcome of the effect of this outsourced automation capability is otherwise known as ‘automation-as-a-service’ in the sense that it allows commercial buyers of technology vendor products to precisely select the specialised software desired to either augment or enhance their historical sunk costs or to reduce their existing total cost of ownership.
The GreySpark survey of the nine vendor-provided cross-asset e-trading solutions assessed each offering’s asset class and instrument type coverage, client type coverage and granular functionalities coverage across:
- 97 instruments and products types tradable on a listed and on an OTC basis in the cash equities, cash FX, commodities, derivatives, fixed income and credit, and structured products asset classes;
- from both a buyside firm and sellside institution user perspective; and across
- 10 functional groupings comprised of 213 granular functionalities.
Analytics-based Trading: Realising the Benefits
Of the nine vendor solutions included in GreySpark’s survey cohort, Itiviti Group’s UL OMS was one of the offerings selected for independent assessment and scoring. GreySpark’s scoring methodology outputs a simplified 1-5 scale in which:
- 1 represents a functional area that is ‘Not Offered (Not on the Vendor’s Development Roadmap)’; and
- 5 represents a functional area that demonstrates ‘Best-of-Breed’ characteristics.
From a functional capabilities perspective, GreySpark believes that, in 2021, the non-functional attributes of analytics-based trading in the context of a cross-asset e-trading solution are most readily realised by the presence and sophistication of six functional groupings:
- Drop Copies Management – The functional capability of a technology vendor cross-asset e-trading solution to automatically or manually manage and process user or system consumption reports through data normalisation processes that summarise a market participant’s execution activity on a trading venue in as close to real-time as possible. In the GreySpark survey, this functional group covers 18 granular functionalities.
- Exceptions Management – The functional capability of a cross-asset e-trading solution to integrate with external instrument reference data, external end-investor client own reference data and third-party exceptions data providers such as DTCC or Euroclear so that exceptions data and entity data management processes and workflows can be streamlined through the automation of normalisation, validation, enrichment and status assignment processes and workflows, thus minimising the occurrence of breaks in a trade or transaction’s settlement. In the GreySpark survey, this functional group covers five granular functionalities.
- FIX Client Connectivity – The functional capability of a technology vendor cross-asset e-trading solution to use FIX protocols to provide buyside firms or sellside institutions with the ability to provide their clients automatically or manually with services such as trading platform onboarding through the appropriate routing of FIX messages to and from counterparties. In the GreySpark survey, this functional group covers 12 granular functionalities.
- A FIX Order-routing Network (ORN) & Complimentary Business Intelligence (BI) Tools – Applications and toolkits available in a technology vendor cross-asset e-trading solution that allow users of the solution to gain access to third-party financial markets infrastructure through which FIX messages that are transmitted between trading counterparties, and to analyse the historical and real-time data related to that messaging for a range of purposes including end-investor client reporting or for trading strategy analysis. In the GreySpark survey, this functional group covers 14 granular functionalities.
- Risk Management Capabilities – The functional capability of a technology vendor cross-asset e-trading solution to provide users with hedging, position management and other risk management capabilities from a core pricing functionality perspective on an on-demand basis or in real-time. In the GreySpark survey, this functional group covers seven granular functionalities.
- Straight-through Processing Capabilities – The functional capability of a technology vendor cross-asset e-trading solution to provide users with automated trade confirmations, fees and commissions assembly, book / portfolio allocations across equities and equity-linked instruments and products, fixed income, currencies and commodities (FICC) instruments and products, structured products, and listed or OTC derivatives. In the GreySpark survey, this functional group covers 12 granular functionalities.
Figure 1 shows how the Itiviti UL OMS performed versus the other eight vendor solutions covered in the GreySpark survey and scoring assessment from an analytics-based trading perspective.
A key difference between the Itiviti UL OMS and the other surveyed cross-asset e-trading vendor solutions is the consistent presence of simple GUIs supported by FIX connectivity pre- and post-trade market and trade data normalisation and standardisation layers. These FIX connectivity layers process large amounts of data to then output into the GUI only the information that is relevant at any moment in time for a trader or user to ensure, for example, that errors in patterns of thousands of orders are effectively managed in real-time.
This design philosophy extends out to include a unified sales UI for the cross-asset / cross-product or multi-asset trading business, which offers efficiency benefits for desk heads to organise their teams as they see fit through the ability to create a single point of contact on the brokerage side for each client to interface with since the underlying activity data can be made accessible to all sales-traders.
For portfolio traders, this UI-first approach is especially relevant when receiving a new tradable basket, which then requires steps such as trading-related checks, patterns identification, cash balance information and FX exposure. Once the portfolio trader begins working orders into the market, exceptions management notifications that quickly identify outliers are key, as is the ability to see where the P&L of the overall slate of orders is heading on a transaction-by-transaction basis so that those orders going in a negative direction can be amended through preventative action.
Front-to-Back Operational Coverage: Building Holistically to Do More with Less
For any trading business seeking to evolve its utilisation of front-office trading technology beyond the historical confines of the debate surrounding high-touch versus low-touch systems and, thus, business model design, there are three, paramount philosophical underpinnings necessary to successfully execute a change agenda:
- The Need for Efficiency – Using cohesive solutions design as a means of industrialising trading processes to achieve better cost-income ratios;
- The Need for Agility – Focusing primarily on the quantity of the business that can be done with a client at any given time rather than drilling down endlessly into the quality of the service provided, thus garnering the capability to reconfigure the firm’s operational size profile almost at will; and
- The Need for Velocity – Releasing the business from the tedium of incremental change by deploying DevOps approaches to IT management in the cloud that incentivise quicker adoption of innovation where it is accessible and financially achievable (see Part 01 of this series of articles).
Historically, attempts by trading businesses to adopt and then, subsequently, reorientate a historical run-the-business agenda to incorporate any one of those three philosophies are stymied by either the complexity of trading processes and workflows within the confines of a specific asset class – for example, in fixed income and currencies (FIC) trading – such that they mandate continued levels of human trader intervention or by the misalignment of regulatory requirements at a regional or pan-regional level.
When breakthroughs do occur, however, they are inherently driven not by quantum leaps in front-office trading technology design, but rather by the consistent and persistent efforts of third-party technology vendors to incrementally innovate on the commonalities between the multitude of problem statements that they encounter when implementing solutions within their consumer base.
From a functional capabilities perspective, GreySpark believes that, in 2021, the non-functional attributes of front-to-back operational coverage in the context of a cross-asset e-trading solution are most readily realised by the presence and sophistication of five functional groupings:
- Market & Trade Data Connectivity – The functional capability of a technology vendor cross-asset e-trading solution to pull / push historical and real-time pricing and trade-related data for contracts, instruments and products available for trade on corporate and investment banking (CIB) and non-bank brokerage platforms or in an e-manual or manual manner from dark and lit liquidity pools, as well as on exchange group platforms. In the GreySpark survey, this functional group covers 26 granular functionalities.
- Markets Connectivity – The functional capability of a technology vendor cross-asset e-trading solution to provide the users with the ability to connect to exchange platforms, dark pools, multilateral trading facilities and alternative trading systems / broker-crossing networks for equities and equity-linked instruments and products, FICC instruments and products, structured products instruments and derivatives contracts via a range of FIX protocols. In the GreySpark survey, this functional group covers 15 granular functionalities.
- Pre-trade Transaction Cost Analysis (TCA) Tools – The functional capability of a technology vendor cross-asset e-trading solution to offer out-of-the-box analytics covering a range of pre-trade checks, including (but not limited to), for example, price and size checking, price validation, trade surveillance, counterparty exposure monitoring, bonds characteristics analysis and solving and pricing tools. In the GreySpark survey, this functional group covers 17 granular functionalities.
- Pre-trade Tools – The functional capability of a technology vendor cross-asset e-trading solution to offer out-of-the-box pre-trade execution advisory / analytics, order entry, portfolio management, margin management and pre-allocations functionality across listed or OTC-traded equities and equity-linked instruments and products, listed or OTC-traded FICC instruments and products, listed or OTC-traded structured products, and listed or OTC-traded derivatives contracts. In the GreySpark survey, this functional group covers 23 granular functionalities.
- Underlying Market Data Services – Applications and toolkits available in a technology vendor cross-asset e-trading solution’s proprietary functional stack that allow users of the solution to analyse and catalogue historical and real-time pricing and trade-related data contained in third-party provider market data and news feeds, including social media. In the GreySpark survey, this functional group covers seven granular functionalities.
Figure 2 shows how the Itiviti UL OMS performed versus the other eight vendor solutions covered in the GreySpark survey and scoring assessment from a front-to-back operational coverage perspective.
Figure 2: Front-to-Back Operational Coverage Functional Capabilities, Itiviti Group UL OMS vs. Vendor Benchmark (n = 8)
Source: GreySpark analysis
The observable competitive differentiators of markets connectivity and pre-trade tools speak to the wider capability of the Itiviti UL OMS to facilitate operational services for its users around functions such as broker certification and client onboarding. In terms of broker certification, the solution can ingest all the inbound and outbound logs and algorithms, matching them off so that users can see where the Deltas are and what needs to be tested. The company’s product managers can also write enrichments to the ULLINK FIX connectivity bridge so that incoming liquidity data in the form of FIX messaging traffic can be transformed in the ways that it needs to be so it can be consumed in an asset class-agnostic fashion, thus reducing the overall amount of time needed to certify new brokers and to allow users of the solution to begin trading with them in a matter of days as opposed to months.
Likewise, best-of-breed capabilities in client and markets connectivity are also key to the automation of fixed income trading functionality automation such that historically manual processes and workflows can become electronified and thus fit more readily into a broader cross-asset e-trading context. Herein, the Itiviti UL OMS specialises in providing its users with a holistic view of all the possible execution venues that bonds orders or trades could be routed to via the NYFIX network, allowing individual brokers to advertise out their price discovery and price updates with the use of RFQs and indications of interest.
Taken together at the client connectivity layer, automated broker certification capabilities combined with fixed income trading processes and workflows electronification provides users of the platform with one, cohesive experience that generates meaningful metrics every step of the way from in-house validation and approval through to go-live and post-trade analytics.
The Platform Concept: Solutions that Anticipate & Resolve Real-world Problems
Ultimately, an asset class-agnostic, Buy & Build modularity approach to cross-asset e-trading platform design allows both trading businesses and technology vendors seeking to sell into them the ability to focus on the systemisation of human interactions with financial market data inputs and outputs. Specifically, this means building products or solutions from the perspective of:
- an examination of the tasks that traders perform for themselves or for their clients, and the decisions that those individuals make, either consciously or unconsciously, on how to best execute on those tasks;
- a divination and documentation of those task-specific decisions into a rules-based logic; and, finally
- the implementation of that logic into software.
In this regard, the objective is not to further automate low-touch execution flow tasks; those tasks are already benefitting from levels of automation and their journey to full automation can be further improved, incrementally, over time. Instead, the objective is to focus on the areas of the trade lifecycle value chain and the tasks therein that remain subject to human decision-making, to question why a human decision is necessary to execute the task and to then document the reasoning.
This approach stands in contrast to the benefits brought by machine learning applications – which are dependent on a standardised set of inputs producing an expected set of outputs – because it involves getting the root of the reasoning behind what traders do to facilitate and service trading activity, and to the root of the reasoning why. Patterns in behaviour can then be extracted and systemised to the benefit of the trading business and its clients through the elimination of costly, time-consuming, high-touch activities that historically were the preserve of a trader’s so-called magic, thus creating digital locates for trader tasks such as:
- portfolio pricing and hedging;
- facilitation; and
- execution advisory.
Those digital locates, then, stand at the heart of the philosophy underpinning the platform concept in both the buyside and the sellside of the cross-asset e-trading arena. A trading businesses’ human traders continue to play the crucial role in trade or trading strategy ideation, and those approaches to meeting or exceeding end-investor client needs are increasingly immediately realisable through the automation-as-a-service benefits provided by specific technology vendor solution components or modules covering those digital locates.
From a functional capabilities perspective, GreySpark believes that, in 2021, the non-functional attributes of the platform concept in the context of a cross-asset e-trading solution are most readily realised by the presence and sophistication of six functional groupings:
- Direct Market Access – The functional capability of a technology vendor cross-asset e-trading solution to process to trade execution venues different types of orders for multiple securities that are traded through the means of simultaneously buying and selling the contracts, instruments or products as a ‘basket’ that represents multiple positions or synthetically as securities orders that mimic the native order types of an exchange group platform and that allow users to trade order types on other exchange group platforms where those native order types are not otherwise supported. In the GreySpark survey, this functional group covers 12 granular functionalities.
- Execution Algos – A range of capabilities and toolkits within a technology vendor cross-asset e-trading solution that include, for example, an algo container for algos creation and testing, algorithmic trade execution management, an algo wheel and an execution management algo tooling environment for back-testing and scenario testing. In the GreySpark survey, this functional group covers 20 granular functionalities.
- Hedging – The functional capability of a technology vendor cross-asset e-trading solution to provide users with on-demand hedge calculations, continuous / real-time hedge calculations and auto-hedging capabilities across a range of listed or OTC-traded equities / equity-linked instruments and products, FICC instruments and products, structured products and derivatives contracts contained in a portfolio or range of portfolios. In the GreySpark survey, this functional group covers three granular functionalities.
- Order Entry – The functional capability of a technology vendor cross-asset e-trading solution to automatically or manually process the different types of actions or steps needed to record a user’s contracts, instruments or products orders through a variety of different means into either the solution’s own, proprietary order management system or into a third-party technology vendor order / execution management system or into a brokerage venue order / execution management system. In the GreySpark survey, this functional group covers 15 granular functionalities.
- Position Management – The functional capability of a technology vendor cross-asset e-trading solution to provide users with on-demand positions management and continuous / real-time positions management capabilities across a range of listed or OTC-traded equities / equity-linked instruments and products, FICC instruments and products, structured products and derivatives contracts contained in a portfolio or range of portfolios. In the GreySpark survey, this functional group covers seven granular functionalities.
- Smart-order Routing – The functional capability of a technology vendor cross-asset e-trading solution’s pricing engine component to provide users with a range of capabilities that include, for example, pre-programmed client exchange / trading venue risk limits, the ability to internalise orders / trades within user’s own, internal liquidity pool, the ability to route orders / trades into a bank / non-bank broker’s crossing engine, dynamic routing, adaptive routing and configurable sweeping. In the GreySpark survey, this functional group covers nine granular functionalities.
Figure 3 shows how the Itiviti UL OMS performed versus the other eight vendor solutions covered in the GreySpark survey and scoring assessment from a platform concept perspective.
Figure 3: The Platform Concept Functional Capabilities, Itiviti Group UL OMS vs. Vendor Benchmark (n = 8)
Source: GreySpark analysis
The clear focus of the Itiviti UL OMS, and its competitive differentiation therein, across its best-of-breed capabilities in the order entry and smart-order routing functional groups – as well as in its industry-standard capabilities across the direct market access and position management functional groups – speaks to the importance to the platform concept of the utilisation by trading businesses focused on cross-asset or cross-product activities of a central risk book. GreySpark believes that the central risk book approach, which is typically utilised by Tier I universal CIBs to aggregate trading risks across trading desks and – in some cases – across siloed businesses, to aggregate risk across the enterprise is now entering into use with Tier I global and pan-regional or regional banks in response to post-financial crisis regulatory constraints on the balance sheet.
Utilisation of a central risk book approach to cross-asset or cross-product trading in the context of equities and equity-linked instruments and products trading means that, when sales-traders or traders give risk to a client or customer, they are required to think about the entire desk or trading floor as a portfolio, and to then make decisions on the risk given out that are backed by analytics generated by the order and execution management components or modules of their trading platform. In the context of FICC instruments and products trading, the central risk book approach means that sales-traders or traders can use the trading platform’s analytics to direct a client or customers liquidity in the form of pricing to the brokerage execution venue that contains the best possible mix of bonds and swaps instruments needed to increase the possibility of finding a close-enough like-for-like match on the other side, thus limiting information leakage and saving both connectivity cost and time mismatch risk.
Finally, the platform concept’s strengths ultimately lie in the breadth and depth of instrument and product types available for access via the trading technology vendor cross-asset e-trading solution. Increasingly, this means that vendor specialisation in the order management and smart-order routing capabilities for passively-traded instruments and products such as exchange-traded funds or listed, vanilla structured products on top of or in addition to industry standard capabilities in at least one of the five major asset classes represents the difference in the successful delivery of the platform concept as a non-functional attribute.