The imminent adoption of amendments to SEC Rule 606 was high on the list of hot topics when electronic trading professionals met at the FIX Americas conference in New York this week. And while speakers, panellists and delegates acknowledged the initiative represents a significant challenge in terms of technology resource, most said they believed the enhancement to transparency would improve market quality and foster innovation.
Last December, the SEC adopted amendments to Regulation NMS (National Market System) Rule 606(b)(3) that would require additional disclosures by broker-dealers to their customers with respect to the handling of their orders. The amendments seek to address the perceived conflict between broker-dealers’ venue selection and the best interests of the client in any given order.
The concern is that broker-dealers may select a venue based on economic factors irrespective of the impact on performance of that order for the client. As a result, the amendments – which come into force next month – will require broker-dealers to furnish more information to buy-side firms about their routing decisions, thereby allowing investment firms to select the broker-dealers best suited to achieve their execution goals.
Operating under Chatham House rules, speakers from across the board suggested that the new requirements would require ‘significant build’ by the sell side, adding to the perception of an arms race on Wall Street. However, speakers said the additional transparency was appropriate in the ‘unbundled world’ of execution post-MiFID II, a European regulation that is having substantial impact globally. By unbundling broker research from execution services, MiFID II sought to improve transparency around true cost of execution, allowing buy-side firms to make more informed decisions about where to route their orders.
Some attendees at the FIX event – held at Goldman Sachs’ 200 West Street facility Downtown – believed that the Rule 606 amendments would herald a new wave of innovation. As broker-dealers provided more information to the marketplace about execution quality, buy-side firms and their technology partners could leverage this data into better analysis of liquidity, further resulting in improvements in fill rates.
One such initiative is the Routing Transparency Initiative (RTI), spearheaded by Enrico Cacciatore of Voya Investment Management, to add more information about buy-side managers’ intent to FIX-based order messages. Involving a committee of buy- and sell-side trading professionals, the RTI is expected to go public about its plans in the coming weeks.
Elsewhere, the FIX Americas conference saw much discussion of buy-side algo wheels, and the effort and investment required by the sell side in order to be included in them. But there is also a risk that the investment can go to waste if the client doesn’t have sufficient flow to justify its long list of broker-dealers on the wheel.
Other hot topics at the event included the ongoing shift toward electronic trading on exchange-like venues in the FICC markets, creating a marketplace based on firm quotes rather than the primarily indicative nature in today’s OTC markets. Speakers and panellists also confirmed growing acceptance of cloud-based, hosted and Software-as-a-Service (SaaS) type delivery models for trading applications, data and analytics.
Many of these themes, all part of the ongoing digital transformation of capital markets, will be discussed at A-Team’s own TradingTech Summit in New York on June 11, 2019. For a preliminary agenda, see here.