The global trading landscape is changing, driven by regulation, automation, cost pressure and the search for alpha. In response, sell-side firms are rebalancing their high-touch order management and low-touch direct market access (DMA) trading, and considering new approaches to achieving accurate and efficient electronic trade execution at speed and scale. On the buy-side, firms continue efforts to contain costs and ensure best execution, particularly in the wake of Markets in Financial Instruments Directive II (MiFID II) going live on January 3, 2018.
To find out more about how trading is evolving and the challenges and opportunities this presents, we talked to Richard Bentley, chief product officer at Ullink, about hi-touch, low-touch and hybrid trading solutions, the implications of low-touch trading, and the potential of low-touch, cross-asset trading platforms.
Setting the scene, Bentley described how low-touch electronic DMA trading based on exception handling is challenging traditional high-touch care order trading. He explained: “From a cost and efficiency standpoint, using low-touch technology allows one trader to do the equivalent business of 10 traders using high-touch technology. But there is still a need to be able to move flow from a low-touch to a high-touch environment. For example, if a low-touch trade is seen as a market risk by a trader, it can be moved to the blotter of a high-touch trader who can work it as a care order. Integration between high-touch and low-touch systems is critical and hybrid systems are beginning to emerge.”
Ullink offers interoperation between its low-touch solutions and its own and other vendors’ high-touch solutions. It also provides pre-trade risk technology in the trading flow that validates orders, but does not add undue latency, and a smart order router (SOR) designed to meet the best execution requirements of MiFID II and other regulatory regimes such as the US RegNMS.
Ullink identifies the key functions of low-touch trading as alerts and drilldown, functions that are not well supported by traditional high-touch order management systems (OMS). The company’s low-touch platform was built from the ground up to support trade volumes running into millions of orders a day and provide traders with rich tools for tasks such as flexible exception management.
Based on a thin client concept, including a light front end with sophisticated filters and a data server supporting indexing, search and notification, the platform allows traders to make Google-like searches across any aspect of an order, such as instrument, size or market. A trader begins typing using natural language and the search filter kicks in, updating on every keystroke, and providing the trader with a real-time view of order details.
Smart alerts and drilldown are key to both DMA and Direct Strategy Access (DSA) trading, which routes client orders directly to algorithms that, in turn, release child orders directly to the market. This introduces a new type of exception, such as an algo not achieving a pre-calculated key performance indicator (KPI), as well as the need for richer order management controls that can, by way of example, modify algo parameters in-flight, or route an order, or part of an order, from one algo to another.
While the rich analytics and controls that support DMA and DSA have traditionally been the preserve of high-touch trading, they are beginning to be integrated in low-touch platforms, suggesting a move towards technology convergence in a single trading platform.
The emergence of a single platform is also indicated by increasing electronification across asset classes and a resulting rise in automated trade flow. In this scenario, managing trading by exception will become the norm and will require rich controls to identify and execute any exceptions in a large volume of in-flight orders quickly and efficiently.
Ullink’s experience in the market bears out the rebalance of low-touch and high-touch trading, with the former being the fastest growing part of its business. Many Tier 1 sell-side firms are replacing home-grown low-touch systems with best-of-breed low-touch vendor products, although some continue to put low-touch DMA flow through high-touch OMS solutions, an approach that fails to scale as high-touch solutions are not designed to support high volume flow, and alerts and notifications with drilldown capability.
Tier 2 and 3 firms that have not previously offered DMA are opening desks for low-touch, high flow trading, often supported by vendor managed or hosted services. Smaller brokers, with fewer direct market memberships and less investment in building their own algos and tools, are increasingly relying on larger firms for services to support DMA trading.
With the pace of low-touch trading picking up, it is important to consider its implications. In derivatives markets, by way of example, there are often lots of small order fills that flow through the middle-office and clearing. This is expensive and calls for aggregation. Bentley says: “It’s not just traders that must make sense of DMA high trade volumes and executions. These trades flow through a number of systems, so to make low-touch trading successful it’s important to consider its implications in the middle and back office.”
While high-touch trading won’t disappear in a market that continues to include illiquid products, OTC products that are traded bilaterally, and large, potentially market moving, blocks of exchange traded products, low-touch trading is where developers are pushing the boundaries. Ullink low-touch clients tend to trade specific asset classes such as equities and liquid derivatives using individual platforms. As fixed income becomes more electronified it, too, will be traded in a dedicated low-touch environment, begging the question from a broker perspective of whether a single low-touch trading platform supporting automated flows of multiple liquid assets will become a possibility.
Over the past few years, and to accommodate MiFID II’s extension to cover more asset classes with a consistent set of trading rules, Ullink has been working with clients to implement single cross-asset OMS solutions that centralise the technology stack and deliver both efficiencies and considerable cost savings. Will this approach filter down to low-touch DMA trading? Bentley says yes, but is hedging his bets on when this will become the norm.
This blog is sponsored by Ullink.