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How Trading Operations Changes Both Cut and Inflate Costs

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Even as fixed-income trading operations technology makes up its lag behind equities trading technology, the overall costs in trading operations are likely to increase, causing investment firms to have to pay more, according to panelists who will be considering “Trading in the new normal environment” at the Intelligent Trading Summit in New York on June 8.

“Markets and investors are embracing the role that high-frequency traders play in providing liquidity and being the engine behind making our markets the best they’ve ever been,” says Bill Harts, CEO of the Modern Markets Initiative, an association of high-frequency electronic trading firms. “We’re at a point today where trading has never been less expensive, but as an industry, we get very concerned when we see costs layered on to what investors have to pay. Costs levied by exchanges, especially for market data and co-location, find their way into the spreads that market makers display.”

“Speed bumps,” as allowed by US Regulation NMS, favor low-latency liquidity providers by letting them back away from quotes they gave. The regulation affects many market structure decisions, according to Harts. “The question is whether exchanges should get exemptions from Reg NMS,” he says. “Maybe we should make all exchanges have speed bumps, or none at all.

“Speed bumps have always been bad market structure,” Harts adds. “They contribute to investor confusion and market complexity.”

Improved technology stands out

Just as equities traders would like to be rid of speed bumps, fixed-income traders want to untangle hindrances such as outdated technology, according to Andrew Keane, global head of listed derivatives algo trading in the futures and OTC unit of Citi. “They can catch up quickly, but it depends on what state your technology stack is in,” says Keane. “It might take longer to untangle the web of technology that has been huddled together over for years.”

Trading analytics has attracted more investment from technology budgets, especially for equities, according to Keane. “In futures, we have more people asking us for analytics of how they’re executing and managing their portfolios,” he says. “Some of the buy side has had algos built in-house and are now looking to leverage those algos due to the cost of regulation.”

For Citi, investment in providing those algorithms and trade order analytics has been a differentiator, according to Keane. In derivatives trading, providing execution algorithms is becoming more competitive, he observes. “Clients want to unload some of their costs and lean on us as execution experts, to get their trades done and then produce analysis to show they are beating benchmarks,” says Keane. “We’re giving a value add to their bottom line.”

Large asset managers want direct access to liquidity and “once big asset managers demand to trade a certain way, because it’s cheaper for them, if you don’t comply, you won’t get their business,” says Keane.

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