Technology:
Outfitting of the Trading Desk
Moderated by: Andy Luro Venture FSG
Agenda Topics
Panelist Introductions
What Venture FSG is Hearing
Panelist Presentations
Questions and Answers
Panelists
Andy Sommers,
Senior Vice President, Investment Trading Systems
Putnam Investments
Rick Enfield CPA
Director of Product Management
Charles River Development
Mark Clark
Executive Vice President Direct Market Access
SunGard/BRASS
What Venture is Hearing
Connectivity
Intelligent Trade Automation
Algorithmic Trading
Trade Regulations
Integration
Market Data Access
The Trading Function
Changes and Challenges
Presented by: Andrew Sommers Putnam Investments
Agenda Topic
Equity Trading – The Mature Environment
Fixed Income Trading – The Opportunities
Equity Trading
Maturity in Order Generation and
Management
Robust Electronic Communications
Measuring the Effectiveness of
Implementations
Fixed Income Trading
Improving Electronic Communications
Increasing Use of Derivative Instruments
Increasing Demand on Compliance,
Reporting, and Risk Analysis
Compliance & Regulations:
Technology Impact on the
Trading Process
Presented by: Rick Enfield Charles River Systems Inc.
Agenda Topic
Equity
Fixed Income
Derivatives
Foreign Exchange
Equity Trading
Automated Routing and Algorithms
Ultra High Volume Executions
Impact of Wealth Management
Fixed Income
ATS Processing and Origination of
the Order
Generic Security Processing
Post Execution Allocations
Data Management and Consistency
Derivatives
Measuring Exposure / Look-through
Growth of Credit Default Swaps
Intraday Valuation
Foreign Exchange
Local Cash Overdrafts
Currency Swaps vs. Overlay Management
Intraday Exposure Management
Counterparty Exposure Management
Changes in Trading Technology:
A Sell-Side Perspective
Presented by: Mark Clark SunGard / BRASS
Changes in Trading Technology: A Sell-Side Perspective
Structural Shifts in the Business of Trading
Corresponding Movements in Trading
Technology
Closer Looks
Direct Market Access
Algorithmic Trading
TCA/Trading Analytics
Open Questions/Areas to Watch
Structural shifts in trading: client-driven changes
1. INFO/ACCESS:
Broker-Dealers lose
information/market
access advantages
2. FEES: Clients
demand and get
reduction in
commissions
3. CLIENT MIX:
Hedge Funds/
Quants become
important clients
4. TRADING MIX:
Clients drive
algorithms,
program trading
48%
Trade
Reports
16
0%
800
40%
Quant
600
12
-5%
-6%
8
Hedge
Passive
chart
30%
Quant
Hedge
Passive
chart
22%
400
20%
Insides
(Level1)
-10%
Active
4
-15%
‘98
‘00
‘02
NASDAQ: Average Messages
Sent per Day [Millions]
10%
-14%
Quote
Updates
‘96
Active
200
0
’95-’00
0%
'00
'00-’04
Annual Change in Per Share
Brokerage Commissions [%]
'03
US Buy-Side Trading Vol.
[Billions of Shares]
Source: Mercer Oliver Wyman Analysis, Morgan Stanley Research, NASDAQ; NYSE; SIA; SunGard Analysis
'00
'04
NYSE Program Trading
Volume Percentage
Structural Shifts in Trading
Pressures from evolving market structure and regulation
Areas of Pressure and Change
Estimated Total Compliance
Costs: US $5 billion p.a.
• Regulation NMS
• Combinations and Evolving
Market Micro-Structure
(e.g., NYSE / ARCA)
Auditing
8%
Legal
10%
Training
55%
IT
15%
• SEC and SRO Enforcement
• Sarbanes Oxley
Staffing
12%
… and increasing
Source: Deloitte – 2003 Global Securities Industry Outlook)
The Results: Movements in Trading Technology
Algorithms
and
Conditional
Trading
Smart Order
Placement
Automated
and RulesBased
Trading
Compliance
Handling – Atand PostTrade
Alternative
Execution
Points
Sponsored
Direct Market
Access
Electronic
Client
Relationships
Client
Connectivity
“Hubs”
TCA/ Trading
Analytics
New Equities
Trading
Models
Unified
OTC/Listed
Trading
Global
Markets/
Other Asset
Classes
A Closer Look: Direct Market Access
What Is It?
•
Broker-sponsored direct-to-market, broker, and algorithmic routing
•
Tailored, “smart” execution tools; Staging or direct integration (FIX)
•
Administrative, reporting and risk tools for the Sponsor
Why Is It Important?
•
Increased trading control / reduced information leakage
•
Lower commission and administrative costs
What Comes Next?
•
Smart order placement and trade-through compliance
•
Increased execution points, e.g., block systems, new
markets/ECNs/ATSs
•
OTC/Listed, cross-asset, and cross-market access
A Closer Look: Algorithmic Trading
What Is It?
•
Automated block/strategy trading; managed historically by traders
•
Increasingly focused on analysis and identification of opportunities
Why Is It Important?
•
Lower commissions
•
Efficiency from electronic order entry and low(?) maintenance
•
Better execution quality - if strategies are used and monitored
correctly
What Comes Next?
•
Commodity “white labeled” algorithms
•
Implementation outside of equities
•
Strategy selection support and benchmarks/analytics
A Closer Look: TCA/Trading Analytics
What Is It?:
•
Post-trade transaction cost analysis tools
•
Standard and customized reports and benchmarks
Why Is It Important?
•
Demonstrates compliance and value
•
Facilitates trading improvement
What Comes Next?
•
Pre-packaged reports, benchmarks, and standards
•
Better accounting for new trading types, e.g., algorithms and
programs
•
Integrated pre-trade and at-trade tools; OMS and DMA links
Open Questions/Areas to Watch
Exchange Market Structure
Market Data – More of It
Regulation NMS Interpretations:
Exemptions, e.g., Block Trading
Order Placement
Compliance
New Entrants
What Venture is Hearing
Questions & Answers