S
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INSIDE—
Issue
1—Advance edition
DAI
LY
PARI
Exchanges told
Double vision ArticleExchanges
Turquoise still
to prepare for
hidden from
21 ‘badl
plagu
shake-up
es criticises
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view
trade reporting
Edhec-Risk chief alert to MTF
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challenge the best execution
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of MiFID
A
YOUR REGULAR ISSUE OF
THE TRADETech DAILY
Non-displayed enthusiasm
for
Commission hits
back at MiFID
J
criticism
B
Gaps in the
MiFID master
plan revealed
more dark pools
Exchange USP
And the
challenge
winners are… s the MTF model
R
J
A
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The official newspaper of TradeTech 2008—Paris
8
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THE TRADETech DAILY—Paris 2008
Issue 1—Advance edition
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THE TRADETechDAI
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PARI
S
post-mifid market
execution Venues
Double vision plagues
trade reporting
Exchanges
alert to MTF
challenge
UK traders lose sight of both sides of the deal as trade reporting fractures
Across Europe, MiFID proves good in parts
N
early six months after the introduction of MiFID, the dust is yet
to settle on the pan-European
directive that is intended to benefit investors by establishing two major reforms:
increased competition and greater market transparency. Whether MiFID is on
course to deliver on those promises is
likely to fuel much of the debate at this
year’s TradeTech event in Paris.
Already there is an expression of dissatisfaction from several UK fund managers who
believe MiFID has actually reduced transparency, rather than increased it. “From a
UK perspective, MiFID has led to us going backwards,” comments Tony Whalley,
investment director and head of dealing at
Scottish Widows Investment Partnership
(SWIP). “The UK market is now less transparent than it was pre-MiFID. That’s the
thing that one finds disappointing.”
Whalley’s downbeat view is echoed by
other senior buy-side figures. “The whole
idea of MiFID was allegedly about breaking
down barriers,” says Daemon Bear, head
of dealing, JPMorgan Asset Management.
“The key word was transparency. But we
are now in the most opaque market conditions I think we have ever been in. It is very,
very difficult at the moment.” Another UK
head of investment speaking at this year’s
event agrees: “Elsewhere in Europe, MiFID
is working fine,” he observes. “Whereas in
the UK, all the effects have been negative.
The market is far less transparent.”
State of confusion
The area of greatest concern is the impact of segmented transaction reporting.
The fact that everybody can report transactions either to the stock exchange or
Markit BOAT makes the market far less
transparent for the buy-side, and has consequences for transaction cost analysis.
Bourses stand firm
and fight back against
the new wave of
competition
A
t first glance it appears Europe’s
incumbent exchanges have a lot
to worry about. Chi-X Europe, a
pan-European multilateral trading facility
(MTF), grabbed 10% of the daily trading
volume on the UK’s FTSE 100 share index in early March. Turquoise, another
MTF, is hoping to capture around 5% of
the European share-trading market when
it launches in September.
There is also the threat of competition from US electronic communications
networks (ECNs) – the rough equivalent
of MTFs. NYFIX Euro Millennium, the
European version of NYFIX’s Millennium ATS, launched in March. Nasdaq
OMX is planning to launch an MTF
based on its INET ECN technology. And
BATS Trading, another ECN, is considering entering the European market.
Market shares
“The key word was transparency. But we are now in the most
opaque market conditions I think we have ever been in.”
Daemon Bear, head of dealing, JPMorgan Asset Management
Before MiFID, many European countries
required all trading to pass through their
national stock exchange, which then fed
the information to market data providers.
Those countries that allowed over-thecounter (OTC) trading, such as the UK,
still required those trades to be reported
to a central bourse. Previously in the UK,
the London Stock Exchange (LSE) would
report the trade and there would be in-
stant visibility through Reuters, Bloomberg or the broker.
But this has all changed with MiFID,
which has opened up competition between exchanges and rival venues for the
business of both conducting and reporting trades. OTC trades can now be conducted away from the exchanges across
the 30 European countries, while these
OTC trades can also be reported any-
Need commitment?
UBS Equities Execution – a partner to rely on
where, as long as the report is carried out
within three minutes.
Across Europe, there are several rival
venues vying for the business of trade reporting. Among the new entrants is Markit
BOAT, which has captured roughly a quarter of the market for trade reporting in
the UK’s largest equities. Figures released
in February by Reuters show that Markit
continues page 2 R
But, far from quailing at this new wave
of competition, exchanges are standing
firm, and are even fighting back. Most of
the main exchanges in Europe have announced tariff cuts, system upgrades and
new services to fend off competition from
upstart MTFs. “Competition is likely to
lead to some fragmentation of liquidity,
but one needs to be careful not to underestimate the response of the incumbent
exchanges,” says Lee Hodgkinson, CEO
of SWX Europe (formerly virt-x). “It is
very unlikely that exchanges will sit back
and let their market share be eroded.”
For its part, SWX Europe is engaged
in a programme of innovation that promises to deliver lower prices and faster
technology. And in response to the growing interest in Europe for ‘dark liquidity’,
SWX Europe is developing a non-displayed liquidity service. The new service
continues page 4 R
In today’s complex markets, you need to be able to call on a partner
who is committed to dealing with your trades in the most effective
way possible. At UBS we are committed to finding the most
sophisticated solutions for our clients. Come and visit us on our stand
at TradeTech Paris to find out how.
When you need commitment, work with us. You & Us.
© UBS 2008. All rights reserved.
THE TRADETech DAILY—Paris 2008
Issue 1—Advance edition
page 1
contents
Q continued from page 1
BOAT has made substantial inroads in the publication
of trades space once occupied exclusively by domestic
exchanges. In each of the three months following the
introduction of MiFID, the value of European equity
trades reported by Markit BOAT was the third highest
after Euronext and the LSE. Markit BOAT also published the second highest volume of European shares,
behind only the LSE.
But this fragmentation of trade data has created a major headache for the buy-side. While acknowledging that
transparency has improved significantly in countries such
as Germany, where many trades were not visible before,
Whalley believes that the requirements in the UK are
far more lax than they used to be. “As a result, we have
got situations where trades in the UK are sometimes not
printing for three days. It’s confusing in terms of working out your post-trade analysis,” he says. “We are seeing
trades reported T+2 and T+3,” adds Bear. “I have even
heard of a T+4, which is actually a day after settlement.”
Another TradeTech delegate reports instances of
one side of the bargain being reported on the LSE
and the other side on Markit BOAT, each with different sizes and prices, leading to an inaccurate figure
on volume. “You are not getting both sides of the deal
reported through the same place, and they are not
getting reported accurately nor in a timely fashion.
You cannot get an accurate figure on volume.”
Conference
l Looking beyond the first wave of
change . . . . . . . . . . . . . . . . . . . . . . . . 7
l Turquoise takes centre stage . . . . . . . 9
l Liquidity gets a makeover . . . . . . . . 10
l Is SOR proven technology for
Europe? . . . . . . . . . . . . . . . . . . . . . . 11
l MiFID makes TCA a more exact
science . . . . . . . . . . . . . . . . . . . . . . . 15
l Are you a leader or fast follower? . . . 17
l Data in an age of silicon . . . . . . . . . . 17
l MiFID rings the changes for
electronic trading . . . . . . . . . . . . . . . 19
l Alpha comes at a price . . . . . . . . . . . 20
l Alpha traders keep the pressure
on brokers . . . . . . . . . . . . . . . . . . . . 21
l Master class in market evolution . . . 22
Wise after the event
Exhibition
l The main event . . . . . . . . . . . . . . . . . 23
l NYFIX promotes Euro Millennium . . 23
l Chi-X celebrates its first
anniversary . . . . . . . . . . . . . . . . . . . . 23
l SOR and algos top Merrill Lynch’s
agenda . . . . . . . . . . . . . . . . . . . . . . . 23
l Linedata connects to research
management platform . . . . . . . . . . . 23
time off in paris
24
7951 Instinet Global ad_Trade tech:v
Although MiFID was intended to throw light on
trades that, prior to MIFID, were under no obligation
to be reported, the UK market’s diminished transparency was highlighted at the end of February when
waste management company Biffa announced that
a consortium planning a possible counter-bid to an
earlier £1.2bn recommended offer had backed away.
As a result of that news, the original bidder, a private
equity consortium, raided the market and bought
10% of Biffa’s shares. Most dealers, however, never
saw those trades going through. “The business was
done off market and the LSE wasn’t used to report
the bargains,” says Whalley. “So the first that people
got to hear about it was the next morning when it was
announced by the regulatory news service.”
Much the same happened when the chief executive
and finance director of computer game retailer Game
Group sold stock worth nearly £5.5m in February.
Once again10:06
the trades
were 1done off-market and not
17/3/08
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Gatewayto
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www.instinet.com
“We have got
situations where
trades in the UK
are sometimes not
printing for three
day. It’s confusing
in terms of working
out your post-trade
analysis.”
Tony Whalley,
investment director and
head of dealing,
Scottish Widows
Investment Partnership
reported through the LSE with the result that many
investors did not find out about the sales until the company made an official statement the next day. With a
single, consolidated source of all trades harder to obtain,
some buy-side firms have asked their brokers to report
only through the LSE. “A consolidated tape would be a
dream,” says Bear. “But there is very little likelihood of
that because MIFID has opened up competition.”
In light of the trade reporting concerns, Bear believes the regulators should take a tough stance. “In
November, the SEC fined a firm for abuse of the trade
reporting regime. Regulators need to be as strong as
that.” Whalley agrees, adding that the cost of Markit
BOAT data is also too high. “It’s the sort of thing that
the regulators should have got involved with, making
sure that data is freely available at a reasonable cost.”
Dealing with fragmentation
Indeed, the fragmentation of the marketplace that has
resulted from the requirements of MiFID looks set to
dominate TradeTech’s post-MiFID focus day, not only
in the trade reporting space, but also in the rise of alternative trading venues that has followed abolition of the
concentration rule. Bear also predicts there will be great
interest surrounding the Q&A session with Turquoise
CEO Eli Lederman. “At last year’s TradeTech, Turquoise was just a project. A year on, it is still a project,”
notes Tony Mackay, president and managing director,
Instinet, whose session, ‘MiFID, Chi-X, dark pools
– now what?’ immediately precedes the discussion with
Lederman. “It’s not as though we have had hundreds of
ECNs or ATSs trying to start up in Europe,” he notes.
“It is still very, very difficult to create alternative trading
platforms in the European landscape.”
Mackay says there has been a favourable response
to Instinet’s pan-European MTF Chi-X Europe, with
the sell-side getting reduced execution costs, and the
buy-side saving substantial amounts versus trading on
the exchange. “There is a lot of work to be done on
MiFID, but the Chi-X Europe numbers show it has
been very good in terms of competition. MiFID may
be imperfect, but the proof is in the pudding.”
Others are more cautious, however. “Competition
via the likes of Chi-X is welcome, but it needs to gather
further liquidity,” says Brian Mitchell, head of dealing
and portfolio control, Baring Asset Management. “ChiX has been a relative success, but it is only at the very
beginning,” adds Bear. Technology, he suggests, will be
the answer to overcoming the challenges posed by market fragmentation and liquidity sourcing. “At TradeTech, I will be looking at how both brokers and vendors
are presenting the solutions to the problems we face.”
Lee Hodgkinson, CEO of liquidity venue SWX
Europe, which changed its name from virt-x in
March, also believes that technology will be crucial in
addressing fragmentation. “It will be very interesting
to see the evolution of smart order routing technology,” he says. “At the moment we have technology
that is more order routing than smart, but I think that
will evolve and will be the key to whether liquidity
can actually be moved around venues or not.”
In particular, Hodgkinson is concerned by the
lack of a single, European-wide, low-cost clearing and
settlement venue. The regulatory change actively encourages cross-border trading and, with it, the crossborder clearing and settlement of securities. Having to
access multiple venues across Europe only increases
costs, while the different clearing and settlement initiatives announced thus far by Turquoise and Chi-X
is set to cause further fragmentation. “While we have
high cross-border settlement charges and additional
infrastructure expenses, it is going to be very difficult
to reduce costs on a pan-European basis as opposed to
the costs in a national market,” remarks Hodgkinson.
Late arrivals and non-starters
A further MiFID-related issue still to be resolved is the
actual transposition and compliance of the directive by
member countries. As MiFID came into effect on 1
November 2007, the European Commission revealed
that a third of all countries were still lagging behind in
incorporating the directive into their own laws. “Only
two countries, the UK and Romania, achieved the 31
January 2008 deadline, when all 30 states effectively
had to incorporate MiFID either into local law or the
local regulatory handbook, although some others, such
as France, have since done so,” adds Mitchell.
In February, the EC referred Spain, Poland and
the Czech Republic to the European Court of Justice for failing to implement MiFID. Although some
industry experts believe this non-compliance does
not in itself hinder the effectiveness of MiFID, Chris
Skinner, CEO of financial think-tank Balatro, argues
that banks in those non-compliant markets could suffer the consequences. “The question is, how will the
banks in those countries be impacted by the tardiness
of their governments’ transposition,” he says. “If you
look at Spanish banks BBVA and Santander in particular, it does potentially damage their ability to succeed. They have got a government that, if anything,
is providing a prohibitive view towards European integration rather than a proactive view. You have still
got a lot of countries yet to transpose and or even
think about how to regulate MiFID.” l
To learn more…
Fragmentation and
liquidity focus day:
Optimal strategies for your trading
desk and defining best execution in
the new regulatory landscape
Tuesday 22 April – 09:00-17:30
MiFID, Chi-X, dark pools – now
what?
Wednesday 23 April – 09:30
In conversation with Eli Lederman
Wednesday 23 April – 10:00
TradeTech sponsors
Lead sponsor:
Principal sponsors:
Organised by:
Supporting associations:
©2007 Instinet, LLC. All rights reserved. INSTINET is a registered mark in the United States. Approved for distribution in
Europe by Instinet Europe Limited which is authorised and regulated by the Financial Services Authority. Instinet, LLC,
member NASD/SIPC, branded as Instinet. Instinet Europe Limited is a subsidiary of Instinet Incorporated.
THE TRADETech DAILY—Paris 2008
Issue 1—Advance edition
page 2
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Q continued from page 1
has been developed in conjunction with
NYFIX, and will be powered by Euro
Millennium.
SWX Europe is not alone. Other
exchanges have launched initiatives to
ensure they stay relevant in the face of
competition. Examples include the London Stock Exchange’s TradElect low-latency trading platform, NYSE Euronext’s
SmartPool non-displayed liquidity service
and Deutsche Börse’s Xetra Best MiFIDcompliant trading service.
Hodgkinson believes that if exchanges
stay on top of their game, they will not
be marginalised. “If incumbent exchanges
embrace the role of commercial service
providers and become more innovative, agile and customer-centric, there
is no reason why they can’t continue to
be robust venues of liquidity in the years
ahead,” he says. “I don’t want to give the
impression that there is any complacency,
but the demise of exchanges has been
greatly exaggerated.”
Peaceful
co-existence
Although much has been made about the
battle between exchanges and MTFs for
order flow, some clearly do not see the
cause for conflict. Exchanges and MTFs
are very different businesses, and have
different strengths and weaknesses, they
argue. Therefore, the two types of venue
should be able to co-exist.
“I don’t know that I see the ‘versus’,”
says Rainer Riess, managing director for
cash market development at Deutsche
Börse. He believes exchanges have a responsibility for helping finance the economy and ensuring the growth of companies as listing venues. “That is a very
important function that exchanges enjoy
and that MTFs cannot and are not targeting to fulfil,” he says.
Given the appetite for different instruments and different types of trading appli-
THE TRADETech DAILY—Paris 2008
“At this stage of the game, many see
it as a case of ‘exchanges versus
MTFs’… at the moment there is a lot
the exchanges could learn from us,
particularly on the pricing front.”
Peter Randall, CEO, Chi-X Europe
cations, the market can support both the
exchange and MTF model, says Riess. “It’s
more a question of demand and supply,” he
observes. “The benefit of an exchange is
that it is a neutral, well organised and strictly supervised secondary-market trading facility that is open to all parties,” he explains.
“That is something that not all market participants necessarily need or demand.”
Far from rejecting the MTF model,
some exchanges are embracing it and using the legal structure to their own advan-
tage. NYSE Euronext’s SmartPool will be
classified as an MTF under MiFID, for
example, and the open market section of
the Frankfurt Stock Exchange – Deutsche
Börse’s main operating entity – is considered an MTF.
“An MTF is a very flexible framework,”
notes Roland Bellegarde, head of European cash markets at NYSE Euronext. “We
are using MTFs as a framework to compete. It is good for the customer, good for
the exchanges, good for competition.”
What is more, the competitive threat
posed by MTFs has spurred the exchanges
to review their business model. “It helps
us bring more innovation,” contends Bellegarde. NYSE Euronext is following the
lead taken by Chi-X in introducing finer
tick sizes for a range of European stocks.
“Chi-X offered lower latency and we now
have similarly low latency,” he notes. “It
helps us improve; that’s the real benefit of
competition.”
Finer tick sizes and low latency trading
platforms are attractive to high-frequency
traders such as statistical arbitrageurs. This
is arguably bringing new liquidity to Europe; stat-arb traders previously shunned
the Continent because of the high latency
of exchanges compared with the ECNs in
the US, but are now showing more of an
interest since Chi-X shook the market up
and latency started to fall. An increase in
trading is expected to benefit all venues,
not just the newer, faster MTFs.
“For a liquid market such as Xetra, arbitraging is quite beneficial,” says Riess.
“We see that whenever the other markets,
be it regional exchanges or Chi-X, for
example, attract more volume, we usually
do more volume as well. The increased
competition ushered in by MiFID may
also lead to more arbitrage opportunity,
and that in turn can be quite positive for
our business.”
Even MTFs believe exchanges could
benefit from their presence. “One of the
things we could see play out is that new
trading venues attract new strategies and
participants into the market and overall
volumes go up so much that even the incumbents benefit,” says Eli Lederman,
CEO of Turquoise. “In the US, for example, the incumbents have had to lower their
tariffs but because volumes have gone up
so dramatically, they ended up better off.”
European exchanges will not automatically share in the spoils of new liquidity
flows, warns Lederman. “In Europe there
“Competition
is likely to
lead to some
fragmentation
of liquidity, but
one needs to
be careful not to
underestimate
the response of
the incumbent
exchanges.”
Lee Hodgkinson, CEO,
SWX Europe
is a very real question whether some of
the incumbents can actually process increasing volume,” he contends. Upgrades
in trading technology will be required
if the exchanges are to benefit from the
same phenomenon, “should it happen,”
adds Lederman.
Peter Randall, CEO of Chi-X Europe,
is sceptical about the pricing and technology improvements exchanges have made
Issue 1—Advance edition
page 4
to date. “They have not really been cutting costs or changing prices,” he asserts.
“They might change the execution price
on one level, but then they increase the
market data charges. All other things being equal, the exchanges are not reducing
prices at all – in fact they are increasing
their revenues. There is ample evidence
that these are well-worked-out and extant
strategies.”
And although exchanges contend that
they can co-exist with MTFs, Randall believes there is some way to go before this
happens. “At this stage of the game I think
many see it as a case of ‘exchanges versus
MTFs’,” he says. “In a more mature environment, when we and other entrants have
reached our natural market share, I think it
will be more of a co-existence, but at the moment there is a lot the exchanges could learn
from us, particularly on the pricing front.”
Competition pending
Despite all the talk about increasing competition, however, exchanges are keen to
point out that so far, they have not seen
much of it. To date, the only true competitor to European exchanges’ central limit
order books is Chi-X Europe, and some
doubt the impact it has had.
“There is a lot of talk and myth out
there in the market,” says Riess. “If you
look at the facts, a lot of these MTFs
haven’t come to life. Often we don’t even
know what their market models will be.
The only one operating on a pan-European basis at this point in time is Chi-X
Europe, and we don’t see much correlation with our business at present.”
Even when more competition arrives,
it could be limited. It is debatable whether
the post-MiFID market in Europe is destined to resemble the US, where a large
number of ECNs and dark pools compete
with the main exchanges, due to the absence of a single clearing and settlement
mechanism in the mould of the DTCC.
In contrast, Europe has a number of in-
buy-side adVice for chi-x
Tony Whalley, investment director at Scottish Widows
Investment Partnership (SWIP), has been appointed as a
non-executive director of Chi-X Europe. The appointment
will not affect his existing duties at SWIP.
“If you look at
the facts, a lot
of these MTFs
haven’t come
to life. Often we
don’t even know
what their market
models will be.”
Rainer Riess, managing
director for cash market
development, Deutsche
Börse
digenous settlement and clearing systems,
each with its own nuances. This makes it
difficult and costly to trade across borders
and for new pan-European platforms to
challenge the national exchanges.
There are other jurisdictional challenges linked to different tax regimes,
currencies and the existence of stamp duty
in some countries. “If I wanted to offer efficient equities trading in the UK tomorrow I couldn’t, due to the complexities
in the post-trade processes,” comments
Riess at the Deutsche Börse. “It would be
Whalley was attracted to the position because it gives
him a chance to have a say in the future of the European
trading landscape. “It’s all very well sitting on the sidelines
pontificating about various new exchanges, how they’re
going to work, what they’re doing well and what they’re
doing badly, but to be offered the opportunity to influence
one from the inside rather than from the outside looking in is
absolutely fantastic,” he told The TRADETech Daily.
In the role, Whalley will effectively open a communications
channel between the traders and the MTF. “I would imagine
that the vast majority of the time will be spent acting as a
sounding board from a buy-side perspective, and secondly
acting as an interface for anyone from the buy-side or sellside who wishes to ask questions about the way the whole
thing is going to work,” he says.
Whalley is no stranger to advising trading venues. He is
a member of the London Stock Exchange’s institutional
advisory group, and has previously served as a nonexecutive director of OMLX, the London-based securities
and derivatives exchange. He was also a member of the
market advisory board of LIFFE. “I’ve tried in the past to take
a fairly active role in the advent of new markets and trading
platforms, and this is one where I feel hopefully I’ll be able to
provide a positive input on what’s going on.”
very difficult to deal with the stamp duty
issue. It is extremely complex. Crest [the
electronic settlement system for UK and
Irish securities] operates differently from
most CSDs in Continental Europe and
the insolvency rules in the UK are differ-
ent to the rules in Germany, which are in
turn at variance to the ones in France.”
Europe’s challenging post-trade environment can be overcome, however. In
the case of Chi-X, for example, a nonexclusive clearing and settlement agree-
to learn more…
exchanges vs. mtfs: six
months post-mifid, where
are we in the battle for
supremacy?
Thursday 24 April – 12:30
ment was struck with the Fortis European
Multilateral Clearing Facility. “Clearing
and settlement is a big barrier – I don’t
disagree with that position,” says Randall
at Chi-X. “But it is a barrier that we have
stepped around.”
Dog eat dog
Although much of the focus today is on
how MTFs will affect the exchanges’
business, there will also be competitive
tensions between rival MTFs. “One thing
that needs to be considered is the effect
the new entrants have on the business
propositions of each other,” says Hodgkinson at SWX Europe. “In this context,
the conditions prevalent in the US that
have led to the success of many ECNs
won’t necessarily exist on a like-for-like
basis in Europe.”
It is uncertain just how many MTFs
the European market can support. At
Turquoise, Lederman argues that when
competition hots up between trading platforms, profit margins can start to dwindle
quickly. “What seemed like a good idea
rapidly starts to look like an easy way to
blow a lot of money,” he warns.
Nevertheless, with MiFID only six
months old, the future for European
equities trading is far from decided.
“The next step is for the firms wanting to launch new initiatives to deliver,
and then once they deliver to find out
if there is enough success over time to
build credibility and stay on the field,”
says Bellegarde at NYSE Euronext. “It’s
easy to say ‘I have 3% market share’ or ‘I
have 5% market share’ but the question
is: is it sustainable?” l
Imagine an image of a smart, successful looking trader (with glasses),
surfing the ferocious tip of a gigantic wave (which symbolises liquidity, of course),
and some emotive line about “harnessing the power of our massive liquidity.”
or we could just say:
Liquidnet’s European liquidity pool averages £15 billion daily.†
† Based on trade data from 1 January - 31 January, 2008. © 2008 Liquidnet Europe Limited, Liquidnet, Inc., Liquidnet Canada Inc., Liquinet Asia
Limited and Liquidnet Australia Pty Ltd. All rights reserved. Liquidnet Europe Limited is regulated by the UK Financial Services Authority.
THE TRADETech DAILY—Paris 2008
liquidnet.com
Issue 1—Advance edition
page 5
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VieW from the chair
Looking beyond the first
wave of change
The TRADETech Daily sat down with Jeff Wecker, CEO, Townsend Analytics (TAL) and opening chairman of TradeTech
Europe, to discuss the issues that he sees as key for the European trading community to confront.
J
eff Wecker, CEO, Townsend Analytics (TAL), will
be bringing a dual perspective to his role as chairman of the TradeTech Europe conference: on the
one hand, TAL is a company with a global client base
for its direct-access trading platform; on the other it developed the technologies behind Archipelago, one of the
ECNs that arguably did most to shake up the US trading
landscape. He is therefore well placed to assess the challenges that European traders are now confronting.
Wecker also has a personal background in automation. He was appointed CEO of TAL just over a
year ago, after its acquisition by Lehman Brothers.
Wecker originally joined Lehman several years
before that to create the firm’s electronic equity brokerage platform.
In addressing the challenges in the European market,
he distinguishes between the users and the destinations.
“With respect to the users, even those that are local to
Europe have been dealing with at least some degree of
fragmentation,” he points out. Whether in the form of
multiple exchanges, dark pools or simply more algorithms, fragmentation is already a live issue for them.
“What is different is that they have MiFID to deal
with,” he says. “We’ve only seen the first wave of what is
probably the largest financial market regulatory change
in the history of the planet.” While some may regard that
as a rather dramatic statement, Wecker is unrepentant,
pointing to the range of different markets that MiFID
affects and the number of providers across those markets.
“It compresses into a single piece of legislation changes
that the US has managed over 20 years,” he adds.
The fact that the significance of the reform has
yet to fully permeate the consciousness of market
participants is understandable, Wecker believes. “It
takes time to appreciate the implications of regulatory reform when it’s that broad,” he suggests. For
there to be a pervasive sense of change in the marketplace, says Wecker, there needs to be a ‘tipping point’
in terms of the products and solutions that emerge
from the opportunities that the legislation enables.
“It doesn’t happen just because the regulators say
‘Okay, this is now effective’,” he contends.
Of particular interest in Europe, he believes, is the
post-trade environment, given the current fragmentation at a national level and the changes that MiFID
will wring in that regard. “It’s been common knowledge for a long time that as you see clearing consolidation and efficiencies from electronification, volume
growth accelerates dramatically,” he comments.
Needs must
Given the extent of the regulatory change in the US
over the past decade and the related market evolution,
a sizeable proportion of buy-side traders in Europe are
probably further behind the learning curve than their
US peers, says Wecker, unless they are already trading
actively across the pond. “Electronic trading and the assimilation of new execution channels and analytic content
alternatives have become part of the US trader’s DNA by
force of circumstance,” he argues. In Europe, by contrast,
“there’s still a pretty strong feeling among large swathes
of fund managers that what worked before still may work
okay,” he notes, “There hasn’t been a crowding out of the
guys who are slower to jump on the train.”
He acknowledges that Europe has seen its share of
innovations. “Chi-X and BOAT have made an impact,
Euro Millennium has recently launched and there is
anticipation around Turquoise, but there really hasn’t
yet been a proliferation of MTFs to match the various
liquidity venues in the US,” he comments. For those
new trading opportunities that do exist, he suggests,
a large number of brokers have still to master how to
deliver them effectively into their customer base.
In Europe, says Wecker, the retail investor is essentially represented by private banks or trust banks, rather
“We’ve only
seen the
first wave
of what is
probably
the largest
financial
market
regulatory
change in
the history of
the planet.”
Jeff Wecker,
CEO, Townsend
Analytics
than directly in the marketplace. “You don’t have that
community to create a demand for tools that can sometimes jump across into the institutional community,”
he says. While the institutional markets may have the
reputation for integrating technology into the trading
environment, in fact, he argues, “Electronic trading in
the US really jumped across from retail into institutions,
because the cost pressure on retail hit first.”
Data overflow
A common challenge faced across the globe is the
exponential growth in market data that needs to be
somehow either assimilated or consciously ignored.
“It’s possible to have more data than you can parse
and process and make intelligent decisions from,”
says Wecker. “We’re certainly in that state in the US
and probably in Europe too.”
The buy-side in Europe should be more demanding
of its sell-side providers, Wecker believes. “I don’t think
that the buy-side in Europe is holding the brokers, the
marketplaces and, for that matter, the regulators to as
high a standard of transparency as its peers in the US are
beginning to demand,” he says. “As that pressure builds,
so will the pressure to make more sense out of all this
data that seems to be exploding in Europe.”
In at least, one respect, however, Wecker sees an opportunity for European traders to overtake their US counterparts. “A large proportion of the velocity increase in
European trading is coming from the hedge fund community, which will fuel simultaneous evolution across multiple
asset classes in the electronic marketplace,” he notes.
Wecker describes hedge funds as essentially strategy
aggregators. “The time they take to get going in a new
asset class is much quicker than traditional asset managers,” he says. “I think there’s chance that Europe will
leapfrog the US in terms of multi-asset class trading.”
While equities are somewhat ahead in automation, the
gap between asset classes is not as great in Europe as it is in
the US, he believes. Those who grow up in a multilingual
household may take longer to speak, he says, “but once
they do, they are eloquent in multiple languages.” l
“[MiFID] compresses into a single piece of
legislation changes that the US has managed
over 20 years.”
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THE TRADETech DAILY—Paris 2008
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Issue 1—Advance edition
page 7
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speaker preVieW
Turquoise takes centre stage
Backed by nine of the world’s largest banks and designed to offer a combined dark and lit order book, Turquoise is arguably
the most hotly anticipated execution venue inspired by the MiFID market evolution. The TRADETech Daily spoke to Turquoise
CEO Eli Lederman about the planned launch of the MTF, his formula for success and the scope of the platform’s ambitions.
Will MTFs be in direct competition
with incumbent exchanges for order
flow, or will they co-exist and occupy
different roles?
It’s difficult to predict exactly how it’s going to play
out, but for the most part, from a trading point of view,
the difference between MTFs and exchanges is fairly
academic. In the beginning it will be MTFs versus exchanges, but it’s probably going to rapidly become a
situation where it’s as much MTF versus MTF.
Right now, there is only one live MTF, at least
for continuous trading. But there will soon be two
credible, pan-European MTFs competing head-tohead against the exchanges for market share. For
Turquoise, competition will be about the economics of trading, providing price improvement and the
functional design of the platform.
I don’t consider Chi-X our biggest competitor because it still has a very small market share relative to
the incumbent European exchanges.
Competition will be most visible between MTFs
and exchanges, but clearly the MTFs have to be
thinking about one another from a competitive point
of view. You can’t do that later – you have to be thinking about that as part of your design.
What are the unique selling points
that distinguish Turquoise from the
exchanges and other MTFs?
First, one of the most important things about Turquoise
is the manner in which we are going to launch. We
are going to launch with liquidity in a broad universe
of pan-European stocks – some 300 in total. That is a
very important point of differentiation. We are able to
do that now because we are recruiting a broad base of
members in the UK and Europe who are actively trading across Europe. Secondly, people will have undertaken the work to include us as a destination in their smart
order routers. Thirdly, we’ll be launching with the market-making activities of our shareholder banks.
Another important differentiator is in our functional design. We have an integrated model: there is
a conventional, transparent, fully-lit order book that
interacts with a dark pool. This contains orders that
are, in MiFID terms, ‘large in scale’. This interaction
happens for the 300 European index names.
Behind that, for another 1,200 or so names, we’ll
have a dark-only order book. We think this design, with
the integrated book and the dark-only book with continuous crossing opportunities, is not just a differentiating factor for us but extremely valuable to the market.
Finally, an important point of differentiation is
our clearing solution. We may not be the only one to
use EuroCCP going forward but for the time being
we will be, and the economics that we have designed
with it are compelling.
Recent news reports have suggested
you are aiming for a 5% share of the
European market on launch. Is this
accurate and how quickly do you
anticipate getting to this level?
The exact words were that we would be disappointed if
we didn’t have a 5% share from the outset, but certainly
our aims are much higher than that – we want to attain
considerably more market share than 5%. We expect that
there is going to be a strong appreciation of the value of
what we’re doing and that market share is going to move
to Turquoise rapidly over a matter of days and weeks.
What makes you so confident there’ll
be such a rapid take-up?
The platform is well designed, the technology and
the connectivity to our members are in place, and
we have a compelling economic case. When you add
that all up, what remains is to make sure people have
smart routing in place to connect to you. We are confident that in 2008 people will have that. That wasn’t
always the case. But now people have the connectivity
to us to make the process of moving liquidity much
simpler than it would have been historically.
Some observers have expressed
their surprise at the relative lack
of competition to the incumbent
THE TRADETech DAILY—Paris 2008
“We want to attain
considerably more
market share than 5%.
We expect that there is
going to be a strong
appreciation of the value
of what we’re doing and
that market share is going
to move to Turquoise
rapidly over a matter of
days and weeks.”
exchanges. Why has competition been
slow to emerge?
I think a number of people looked at setting up an MTF
and thought that it had been tried before. They didn’t
appreciate the opportunity that today’s technology offers to realise such an ambition. Some of the people who
could have done it; for example, the US ECNs have
their hands full with trying to be successful in the US.
To some extent, people also looked at Turquoise, with
the support we have from our shareholder banks, and given
the likelihood that we would win, decided that it probably
wasn’t worth spending the money to enter the market.
the ownership structure. There are various parts of the
trading world where we can fill gaps commercially.
If you were at TradeTech a year
from now, how would the debate
surrounding MTFs have advanced?
As competition increases you have to continuously
find ways to differentiate your offering. By this time
next year, I expect people will be talking about MTFs
handling more complex order types, more complex
routing and serving clients in a more creative way. l
to learn more…
in conversation with eli lederman
Wednesday 23 April – 10:00
exchanges vs. mtfs: six months
post-mifid, where are we in the
battle for supremacy?
Thursday 24 April – 12:30
How well are incumbent exchanges
responding to the competition that
already exists and the threat of more?
It has been a token response to date. There have been
relatively minor reductions in trading fees, but you
haven’t really seen anything constructive from the
point of view of people becoming more pan-European or moving to ‘taker-maker’ rebate economics.
You have to assume, however, that the exchanges
must be thinking about the impending competitive
landscape and seriously considering the steps they
will have to take if they’re going to compete.
How much room do you think there is
for more MTFs in Europe?
There is some scope for more, but the commercial
opportunity has to look attractive to potential entrants. If you consider the fact that in any given market there’s an incumbent exchange, as well as another
viable MTF, it will soon be a very competitive landscape. It may not be possible for three, four or five
liquidity venues to make money. Considerable investment is called for to launch in Europe. It requires an
investment in technology, legal and regulatory, people, facilities – it’s a significant commitment.
You also have to have established relationships
with clients. The idea that you can take US technology and airlift it into Europe is a misguided one.
Most people believe that Europe won’t witness the
same type of evolution as the US, where a lot of alternate platforms were set up only to consolidate later
on. There will probably be a more rational structure
from the outset in Europe, and it will stay that way.
How much does this have to do with
clearing and settlement complexities?
A lot. It’s a problem end-to-end in Europe and you
really have to have expertise in all aspects of it. Expertise about European clearing and settlement requirements is a relatively rare commodity.
Chi-X is going global. Are there plans for
Turquoise to expand beyond Europe?
There’s every likelihood that we will look at different asset classes and geographies. That has a lot to do with the
platform we’re building in terms of the technology and
Issue 1—Advance edition
page 9
Market liquidity
Liquidity gets a makeover
Will competition between MTFs and exchanges bring fresh liquidity to Europe?
T
here will be two sides to the debate
on the evolution of market liquidity at TradeTech this year. While
exchanges and MTFs focus on growing
liquidity, buy-side traders will be more
concerned with the question of fragmentation and how best to access these disparate pools.
The emergence of MTFs and systematic internalisers is causing Europe’s
liquidity landscape to be redrawn. But
whether the arrival of new execution
venues is leading to the creation of fresh
liquidity or simply redirecting existing
flow to a patchwork of alternate venues is
a matter of conjecture, given that MiFID
neither necessitates the creation of new
liquidity nor obliges traders to access different venues.
There is certainly evidence of new
entrants winning market share, however.
Chi-X, the first MTF to launch has, on
some days, captured up to 10% of the total
volume on the London Stock Exchange
(LSE), notes Toby Bayliss, European head
of electronic execution sales at Citi.
But is it new liquidity? “Chi-X has
been winning order flow that would not
have gone to any other venue, making it a
creator of new liquidity,” says John Lowrey, head of electronic trading services,
Europe and the Middle East, Lehman
Brothers.
As fledgling execution venues seek to
gain a competitive edge through lower
trading costs and finer tick sizes, new participants will be attracted to the market,
contends Bayliss. There are several examples of fresh liquidity being created since
THE TRADETech DAILY—Paris 2008
“Chi-X has
been winning
order flow that
would not have
gone to any
other venue.”
John Lowrey, head of
electronic trading services,
Europe and the Middle
East, Lehman Brothers
MiFID came into effect, he says, pointing to statistical arbitrage players who
are geared up to profit from small price
anomalies. “New liquidity is emerging as
markets become more efficient and it becomes cheaper to carry out transactions,”
he notes.
“Chi-X currently appeals to a specific
set of specialist traders using quantitative
strategies that seek to take advantage of
volatility,” explains Martin Graham, di-
rector of equity markets, LSE. In recent
weeks, Chi-X’s business in UK stocks has
increased as liquidity providers respond
to the firm’s financial incentives to post
positions, he observes.
Exchange innovation
The whole market stands to gain from
the creation of new liquidity, according to
Graham. While Chi-X may be attracting
new liquidity, he observes, the LSE is also
reporting strong volumes. “The SETS
market captures the lion's share of electronic execution and continues to be
the price formation venue of choice,” he
points out. In January, amidst the market
volatility that ushered in the new trading
year, SETS posted record levels, with up
to 1.4 million transactions on a single day.
There is no room for complacency,
however. The LSE is already in discussion with members over the next phase
of its ongoing plans. Within the next 12
months, it will bring Italian equities onto
its new trading platform, TradElect, expanding the liquidity pool for UK and
Italian stocks. It will also be introducing a
single order book for contracts for difference (CFDs) and equity trades. “We are in
discussions with customers and buy-side
traders about how their needs are evolving, the issues they face and what new opportunities they can see and how we can
help them,” says Graham.
Far from succumbing to the threat
posed by emerging trading venues, across
Europe the incumbent exchanges are
starting to innovate in response to the
challenge. “They are starting to come up
with new settlement structures and, in
some cases, reduced fees and tick sizes,”
observes Bayliss. And the more of a threat
alternative venues become, the greater
will be the reaction from the exchanges,
he predicts.
Too much choice
But offering customers greater choice
as to where to execute orders does not
necessarily mean they are in a position
to make the best decision about where
to post liquidity, explains Lowrey at Lehman Brothers. Evaluating the relative
merits of different liquidity venues and
brokers’ performance in handling client orders is difficult, concedes Bayliss
at Citi.
Convergence would offer a solution
to this, he contends. “Buy-side traders
want the multiplicity of emerging trading
venues to merge together,” he comments.
“They ultimately want to be able to access any liquidity pool seamlessly, without
having to settle on multiple venues or deal
with multiple counterparties.”
Technology has a role to play here. At
TradeTech, Lowry wants to focus on the
role of dark pools of liquidity and the value
of products that match trades automatically at a block level. “Traders need tools
to help them decide where to trade.” l
To learn more…
Accessing and attracting
liquidity in the new trading
landscape
Wednesday 23 April – 08:30
The evolving global liquidity
landscape
Wednesday 23 April – 11:30
Growing liquidity
Thursday 24 April – 12:05
Issue 1—Advance edition
page 10
smart order routing
Is SOR proven technology for Europe?
Can brokers provide what Europe needs?
As European markets fragment post-MiFID, smart order routing is being touted as a ‘must-have’ technology.
A
ccording to a recent report by
Tabb Group, taking into account
national exchanges, ECNs,
crossing networks and dark pools, equity
traders in the US have over 55 different
venues where they can transact.
The speed of execution in these venues is also much faster than that traditionally expected of exchanges. “The
average NYSE floor execution time,
even going back as little as three years
ago, was approximately 14 seconds,” says
the report. “Today most trading venues
(including the NYSE floor) measure execution time in milliseconds and some in
micro seconds.”
Speed has become critical. In addition to the trading platforms themselves,
the way traders access the financial markets has radically changed, the report explains. “Today more than 63% of shares
traded by institutions bypass the traditional sales trader and are received and
managed electronically.”
These changes have spurred the development of trading tools to support this
new environment, not least among them,
smart order routing, allowing an order to
be routed for execution to wherever liquidity can be found.
“Is lack of universal access to
dark pools a concern? Can one
achieve best execution without
interacting with dark pools?
These are questions that we will
need to address.”
Alexandra Foster, head of sales, Global Execution
Services, BNP Paribas
The European arena
As new liquidity venues in Europe begin
to spring up as a result of MiFID, traders are looking to the US to source the
smart order routing technology they will
require.
A TradeTech panel on smart order
routing will be considering whether that
technology has been matching its promise and whether the requirements of the
European markets can be met by drawing
on the US experience.
Given that smart order routing is
mandated at market operator level in the
US, but not in Europe and that Reg NMS
has a heavy focus on best price, does that
change the job specification for brokerowned SOR technology in Europe?
“There are of course both similarities and differences in SOR technology
between Europe and US,” says Alexandra Foster, head of sales, Global Execution Services, BNP Paribas and a session
panellist. “In the US, they have to look at
best displayed price... that’s the law there
now.” Price is important in Europe too,
stresses Foster, but MiFID goes further,
taking into account not only price but
also other possible priorities, such as size,
cost, speed and likelihood of execution
and settlement.
“Brokers in Europe have more discretion about how they define the best source
of liquidity and the best price,” agrees fellow panellist, Toby Bayliss, head of elec-
“In my opinion it’s still
very much a grey area
whether there is an
implicit requirement
under MiFID to be
able to smart order
route to achieve best
execution.”
Toby Bayliss, head of electronic
execution sales, Citi
THE TRADETech DAILY—Paris 2008
tronic execution sales at Citi. That said,
he points out, the way that orders would
actually be routed would be quite similar.
In the US, says Bayliss, an assumption is
often made that because it is the responsibility of the trading venues to reroute orders on clients’ behalf, if there is a better
price shown elsewhere, brokers actually
utilise that functionality. “The reality is
that speed is so important in your routing
decision that brokers are automatically
going to the best price venue at the outset,” he observes.
The problem with relying on the market operator to exercise that obligation
is the introduction of additional latency.
“If you start out at one venue that then
reroutes your order, there's a measurable
delay,” he explains. Under US regulations, venues have up to a second to reroute incoming orders. “If the brokers
want to be hitting liquidity as it appears,
they need to be picking the right venues
straight off,” he says.
Build or buy
Advanced functionality does not come
cheap and, as with many other aspects
of what might be called mission-critical
technology, users face a choice of developing their own solutions or buying
existing products and adapting them. “A
lot of brokers in the US still use independent technology providers to produce their SOR,” says Bayliss. “We at
Citi utilised Lava Trading in the US for
our SOR and became so reliant on the
technology that we purchased the company. We’ve been utilising that intellectual property to create our own smart
order routing in Europe.”
Bayliss points out, however, that the
need for SOR is not universally recognised
in the European trading arena. “There’s
no universal obligation to smart order
route in Europe,” he contends. “I think
that’s a very important difference.” While
some people are still unaware of the benefits of SOR, others are still sceptical about
new venues for liquidity, though that view
is diminishing. “To be honest, there are
only two new venues that are up and running and having any impact: there’s Chi-X
that’s capturing quite good market share
and NYFIX Euro Millennium which has
just started up,” says Bayliss. “We’re connected to both and we're routing to both
on our orders, but there are still people
that feel there isn’t sufficient liquidity on
those venues.”
MiFID will not necessarily force the
hand of these sceptics. “In my opinion it’s
still very much a grey area whether there
is an implicit requirement under MiFID
to be able to smart order route to achieve
best execution,” says Bayliss. The regulations allow brokers to be responsive to
client priorities. “A local broker in a particular market where Chi-X does not yet
operate could argue that they do not need
this technology at all,” he comments.
“There will still be a lot of brokers that
will say that they’re already going to the
most visible, most liquid exchange since
that is still without doubt the primary exchange.”
Where SOR is deployed, it is often
difficult for buy-side clients to judge and
compare its effectiveness. “People are often unaware of how to differentiate the
smart order routers: which ones are sophisticated and which ones aren’t,” says
Bayliss. “When we talk to the buy-side
about how they select their agency brokers, it often comes down to the quality of
execution at the brokerage end and who
has the best technology. But that’s often
a question of who’s providing them with
the best price, not on a single trade, but
over the long term.” Applying comparative transaction cost analysis over a long
period in an algo-driven environment is
still very difficult, he suggests.
For Foster at BNP Paribas, meanwhile,
the changing structure of the market adds
to the challenge for SOR technology. The
repercussions of non-displayed liquidity
and how it affects the displayed markets
are not yet clear in Europe. “Is lack of
universal access to dark pools a concern?
Can one achieve best execution without
interacting with dark pools? These are
questions that we will need to address,”
she says. l
to learn more…
how smart is smart order
routing technology? is it
delivering on its promises?
Wednesday 23 April – 14:30,
Stream A
Issue 1—Advance edition
page 11
JPMorgan LighthouseSM
Finding your way in the dark
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best execution & tca
MiFID makes TCA a more exact science
Last November, MiFID came into force, obliging firms to offer clients best
execution. Bob Giffords1 assesses how they have fared so far
W
hile best execution has always
been the goal for traders, the
abolition by MiFID of the concentration rule, combined with its multifactor approach, the rise of dark liquidity
pools and high velocity trading, has turned
this familiar concept into a challenging
objective. “People focused last year on
getting their MiFID paperwork in order,”
says Robert Kay, managing director, GSCS
Information Services, a transaction cost
analysis (TCA) data provider. “Now they’ve
received calls from the FSA for visits in Q2
and Q3, which has prompted them to look
again and consider what best execution really means. Those who don’t already have
TCA, such as many hedge funds, are now
reconsidering what they should do.”
Jean-René Giraud, director at EDHEC-Risk and opening speaker on the
TradeTech ‘Fragmentation and liquidity
focus day’, believes more firms may need
to review their cost monitoring strategies.
“Many European buy-side firms claim to
use some sort of TCA,” says Giraud, “but
our 2006 research suggests that two-thirds
of them did not capture the necessary
time-stamps to draw useful conclusions.”
He believes TCA has often been more of
a marketing exercise. “Everyone claims to
do best execution,” he says, “but there is
still no consensus – either in the industry
or in academia – on what that means.”
ments to our processes over the years.”
For many firms with advanced TCA
practices, MiFID has brought little
change. “MiFID best execution has actually not really impacted us at all from
a trading perspective,” says Steve Wood,
global head of trading, Schroder Investment Management, “except that we’re
seeing TCA questions in more requests
for proposal (RFP) and the trading desk is
now a regular stop on client visits.”
Other firms are now taking the TCA
plunge. “MiFID gave us the justification
to formalise our existing process-driven
approach, both internally and externally,
and complement it with TCA analysis
from Abel Noser,” comments Betsy Anderson, head of centralised dealing at
Resolution Asset Management (RAM).
“It brought into sharper focus the importance of broker selection and access to
venues in the decision-making process.”
This is particularly important to ensure
reconsolidation of liquidity across fragmented and dark pools. In RAM’s quarterly TCA review, Anderson works with
compliance to highlight those parts of the
process that are more or less efficient and
to help them improve across the whole
investment cycle. This complements an
intensive appraisal of every execution immediately after the fill and a significant
amount of internal communication across
the team, the fund managers and clients.
Performance at the
core
Which benchmark?
Increasingly, however, firms are focusing
their TCA efforts on performance management. “An important component of any
post-trade analysis is the ability to attribute
performance to multiple factors, such as
trade scheduling, order placement, or order constraints,” says Brad Hunt, managing director and head of Goldman Sachs’
electronic trading in Europe. “Optimising
execution performance is to a great extent
dependent on choosing the right algorithm
for a given order and instructing it properly,” he says. “The post-trade analysis review
should incorporate this analysis.”
While Baring Asset Management began using TCA back in 1995 for quality
improvement, the firm now uses it increasingly to assess broker performance,
venues and algorithms in a much more
quantitative and objective way. “TCA is
not just about a simple execution price,”
says Brian Mitchell, global head, dealing and portfolio control, at Baring. “It’s
about evaluating the whole trade implementation cycle from portfolio construction through trading strategy planning
and risk-adjusted execution. We’ve continually made refinements and improve-
There are real rewards to be reaped from a
methodical approach. Chris Marsh, head of
AES trading and product development in
Europe at Credit Suisse, notes, for example,
that, “We’re seeing an average of 1.8bp improvement on Chi-X over the main exchange
at the touch and by comparing clients in aggregate, there is a marked improvement for
those that use the new liquidity pools."
If, however, there is some convergence
on the objectives of TCA, there is much
less on the choice of metrics. “There is a
wide use of different benchmarks, such
as VWAP, implementation shortfall, closing price and arrival price,” says Robert
Boardman, head of algorithmic trading for
ITG in Europe. “There is no right answer.
It depends on your investment process,
trading style and market conditions.”
Another source of variance is the reference data used to populate the benchmark.
Do desks draw on their own trading experience or that of third parties, and, if the latter,
which parties? “Although we’re one of the
few to provide data from BOAT and Chi-X,”
says Kay at GSCS, “most of our clients have
asked us only to include the main exchange
in the benchmark for the time being.” GSCS
“[MiFID]
brought
into sharper
focus the
importance
of broker
selection and
access to
venues.”
Betsy Anderson,
head of centralised
dealing,
Resolution Asset
Management
THE TRADETech DAILY—Paris 2008
“Everyone
claims to
do best
execution,
but there is
still no
consensus,
either in the
industry or in
academia,
on what that
means.”
Jean-René Giraud,
director, EDHEC-Risk
reports on the other venues separately. “We
might need to review this if Chi-X, Turquoise or other venues start to be more actively used by our clients,” says Kay.
In general, Baring assesses all trades
against an appropriate benchmark in the
context of pre-trade momentum considerations, post-trade net returns and market
impact. “The benchmark is typically implementation shortfall,” confirms Mitchell,
“but we might use VWAP, for example, for
large-cap, non-momentum trading in nonvolatile conditions. It depends very much
on the original rationales for trading.”
Schroders, by contrast, only uses implementation shortfall as a benchmark.
“VWAP is the measurement of mediocrity,”
adds Wood dryly. “We don’t use it at all.”
His interest in peer benchmarks is limited
to its use for aggregate analysis. For normal
performance improvement and responding
to clients and regulators on specific trades,
Schroder looks at absolute costs.
“Over many years we’ve developed
three benchmarks depending on the strategy,” says Mat Gulley, global head of trading at Franklin Templeton Investments in
the US. For very large blocks that trade
over multiple days, the firm uses a volumeweighted added-value benchmark; for
smaller same-day orders, implementation
shortfall based on a theoretical cost estimator; and then implementation shortfall
based on the morning’s price, where the
cost estimator is less applicable.
Dealing with outliers
An issue that taxes all buy-side desks undertaking a trade performance assessment is
how to choose the outliers for detailed review. “Besides the aggregate analysis, we focus on the few trades that look expensive, at
least relatively, against the benchmark peer
group adjusted for difficulty, and then analyse why they are outliers,” says Mitchell.
TCA provides the first filter but there are
others. A second-level analysis may be conducted, based on the strategy bias or market
conditions and trading or client constraints.
Any exceptions are then reviewed quarterly
with dealers, senior fund managers and
compliance. Recommendations for process
improvements are circulated.
For Wood, it is not so much a matter
of the best trade as the right trade for each
situation. “A good benchmark helps you to
find outliers and provides a broad comparison with your peers,” he comments. “For
detailed analysis, you need to look at trades
in situ and compare them to net marketadjusted returns to see if they were right.”
Wood believes it is important not to get
bogged down in too much detail. “We look
at the high- and low-cost trades and compare them against the benchmark which
takes account of their relative difficulty,”
he says. “Usually we can explain them quite
easily, but sometimes it takes more time.”
He does not tend to compare them to pretrade estimates, as that would suggest a
benchmark based on historic data without
adjusting for current market factors.
“We need to get below 1% as a reasonable goal for outliers, all of which are,
in some sense, significant,” comments
Professor Michael Mainelli, executive
chairman, Z/Yen. He notes, however, that
this requires taking account of the current
market conditions of the trade, which
most TCA does not do.
“You also need to use artificial intelligence (AI) to highlight anomalies in a
multi-factor world,” he adds. Instead of
fixed rules, Mainelli observes, people are
deploying AI techniques such as correlated, weighted statistics to find an efficient
frontier, using methods like support vector machine mathematics. “These statistical techniques are either embedded inline in the trading algorithm or off-line in
the analytics,” he explains.
A moving target
Does all this bring the goal of best execution any nearer or does it simply help
to establish a baseline for performance?
“The role of MiFID is not to force people to get the best, but rather to improve
transparency and exclude those with unacceptable practices,” contends Giraud.
“But without objective benchmarks, that
could be difficult to address.”
EDHEC has proposed an Estimated
Best Execution (EBEX) metric focusing
on total cost. “This can’t be gamed like
VWAP,” says Giraud, “but until we have
a consolidated tape it may be difficult to
deploy. TCA vendors are, however, working on its implementation.”
The real outcome of MiFID’s best-execution obligation may, in fact, be a continuous learning process by the traders
themselves. “Best execution is a known execution with no surprises,” says Gulley at
Franklin Templeton. “For this the portfolio
managers need to understand the benchmarks and how the traders work, how they
add value. That’s really the goal.”
The goalposts may, however, be shifting as TCA threatens to become even more
complex. “Over the last six months, trading
styles and behaviour have undergone a massive change,” says Boardman. Historic data
is much less of a guide than it used to be; the
emphasis now is on real-time data. “Instead
of analysing spread, size, momentum and
volatility over the past 21 days, we’re doing it over the last few minutes,” he notes,
“though for illiquid instruments the historic
data may still be important.”
Hunt at Goldman Sachs argues that algorithms should be adaptive to such intraday movements. “In today’s fast-moving
markets, your algorithms need constantly
to re-assess the cost of liquidity to decide whether to trade passively or pay for
‘cheap’ liquidity,” he says. “Algorithms increasingly need to interpret market events
and dynamically adjust themselves.”
Real-time TCA becomes particularly
important when accessing dark pools.
“We’re seeing a lot of hedge funds out
there with huge computing power sniffing
around the venues, and we’re hearing growing concerns about disadvantageous trades
in the dark pools,” says Marsh at Credit
Suisse. “We are using our fair-value modelling capabilities to tap dark liquidity pools
on our own terms and remove the potential
negative selections that can occur.”
Performance attribution is a further step
up the learning curve, says Boardman. “It
tries to assess the value added at each stage
of the process: choosing the broker, the
algo, the venue or the actual management
of execution. It’s not easy but that’s our
challenge at the moment.” Gulley agrees it
is a tough call. “By blending the benchmark
with an assessment of the trade-off between
market impact and opportunity cost, we’re
getting closer, but we’re not there yet,” he
admits. “Fund managers need to get comfortable with the benchmarks before they
accept a split of responsibility.”
For Anderson at Resolution, the next
challenge lies with portfolio trades and
support for 130/30 funds. “For portfolio trades, we do much more pre-trade
analysis to decide what is included in the
basket and assess the risk constraints,” she
explains. “We then put the trade out for
tender. We have started to use BidRoute,
which allows us to automate the tendering
process and score the successful brokers,
rather like eBay. We request post-trade
analysis from the broker and factor this
into the rating, relating it back to the type
of basket and the various bids.”
When it comes to 130/30 funds, Resolution tends to trade on a single-stock
basis. “We would always factor in the
cost and availability of borrowing and the
importance of not being recalled ‘on-theborrow’ when assessing costs,” says Anderson. “We would hope to use the TCA data
to enhance and improve processes specifically relevant to the 130/30 funds, focusing
for example on shorting efficiencies, which
could be helpful to traditional long-only
managers overlaying their traditional strategies with a short extension strategy.” l
1 Bob Giffords, an independent banking &
technology analyst, welcomes feedback on
this article: bob.giffords@btinternet.com
to learn more…
fragmentation and
liquidity focus day:
optimal strategies for your
trading desk and defining
best execution in the new
regulatory landscape
Tuesday 22 April –
09:00-17:30
stream b: Volatility,
tca and best practice
relationships
Thursday 24 April
– 15:15-17:20
Issue 1—Advance edition
page 15
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messages are communicated immediately and with confidentiality.
A flexible, open structure means you can use your existing network
provider and Order Management System. The FIX Gateway is an invisible
'hub' allowing you to view the real-time status of brokers before sending
messages to them. This reduces the risk of message failure and limits
potential losses.
Most reassuringly, the FIX Gateway builds on our experience in highly
reliable trading systems. We offer free testing and 24/7 support to
ensure you stay connected.
Meet us at TradeTech 2008, Paris Booth No. 126
To find out more, please contact:
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+44 (0) 20 7797 4135
tobrien@londonstockexchange.com
www.londonstockexchange.com/fixgateway
LSE_FIX_267x396_01.indd 1
03/03/2008 17:54:26
speaker preVieW
Are you a leader or fast follower?
‘Where do you need to be in the low latency race?’ The answer, accoring to Mike Powell, global head, Enterprise Information at
Reuters, depends as much on an institution’s business model as its appetite for pioneering ‘bleeding-edge’ technology.
What are the big latency
issues that delegates will be
talking about at TradeTech?
Where are the latency
bottlenecks in the trade
lifecycle?
A lot of the sell-side and execution-specific brokers were already looking at the
quality of their execution prior to MiFID,
but certainly the regulation has added
to that with its focus on best execution.
With new trading venues emerging, the
existing exchanges are responding to the
threat by speeding up their connections,
upgrading platforms and introducing new
feed products with less latency. That has
put quite a lot of pressure on banks that
develop in-house feed handlers to try
to keep up with this pace of technology
change driven by the exchanges.
You get a lot of people jumping up and
down, talking about the feed handler latency. But it is absolutely an end-to-end
chain – you have all sorts of links in that
chain that can add latency. For example,
how have you set up your comms connectivity? Have you got the right bandwidth? You hear people throwing around
buzzwords like ‘FPGA’ and ‘proprietary
hardware’, but you actually need to go
through your whole chain and do some
fairly mundane things to improve your
latency. You could have an application or
a poorly configured bandwidth connection that may be adding tens or hundreds
of milliseconds. Otherwise you will be
throwing money at the wrong places to
squeeze out a few microseconds.
For whom do milliseconds
count most?
It depends on your business model. If
you are a long-only investment firm, or
even a hedge fund that has a long-short
strategy, getting the last millisecond out
of your execution is not as important as
some of your long-term investment decisions. However, if you are focusing on
being the best execution provider in the
market, or you are an internal prop desk
with a high-liquidity trading model, then
latency is critical. For those for whom latency is important, you can’t afford to be
left behind.
Is there a clear ROI to justify
the front office investment?
There is a law of diminishing returns
on investing in low latency technology.
Once you start getting down to microseconds and nanoseconds, how much return are you really going to get on your
investment? But definitely there are
gaps between people who have invested
heavily in this area and others who have
Are there any downsides to
low latency?
“It is a balance between squeezing out
latency with bleeding edge technology
and having a robust and stable trading
system in place.”
yet to start. That will be where the focus of investment will be: firms who feel
they are now at a competitive disadvan-
tage to other sell-side brokerage firms
trying to catch up in order to remain
competitive.
Yes, we’ve had some issues fed back to
us by a few customers. Let’s say you are
a sell-side firm and introduce algorithms
into your agency trading on behalf of
your customer. You want to automate
your trading to take some costs out and
you also want to offer low latency in order
to win business and stay competitive. But
if your bleeding edge proprietary hardware and technology fails, you are suddenly out of the market for the whole day
and unable to execute your customers’ orders. Stability is extremely important for
certain participants. So it is a balance between squeezing out latency with bleeding edge technology and having a robust
and stable trading system in place.
Has the explosion in market
data led to problems?
The rise in data volume, coupled with market volatility, has created a challenge for
the industry in terms of coping with the
increased volumes. As exchanges upgrade
their networks and platforms to handle
more liquidity, many are looking to increase their depth of liquidity by generating
more quote messages, while the growth in
algorithmic trading is creating challenges
for the market by increasing the number of
trades and associated trade messages. Every
time an algo dissects a block trade into lots
and lots of smaller trades, it creates a new
piece of market data. Whereas five years
ago a large block trade might be split into a
relatively few different trades, now an algo
might break that that up into 100 trades or
more – so that creates 100 messages compared to the former five messages.
What are the consequences
of this?
The increase in market data puts a lot of
stress on both vendors and banks. Even if
a vendor provides all those feeds down to
the bank, they still need the infrastructure
to be able to manage and distribute that
internally. Their applications need to be
sufficiently robust to handle that volume
of data and that means investing in hardware and other solutions. So it is quite a
big industry challenge, and at the same
time everyone is trying to do it faster. A
lot of people are spending money in this
space. I expect volumes will continue to
increase and I don’t think this story will
go away in the near future. l
to learn more…
Where do you need to be in
the low latency race?
Wednesday 23 April
– 15:40, Stream C
technology for the trading desk
Data in an age of silicon
Rounding off the first day of TradeTech will be a panel discussion on why market data is top of the agenda. For panellist Jeff
Hudson, CEO, Vhayu, the scope of the challenge can only be appreciated by examining the broader historical context.
M
ost TradeTech attendees will
have personal experience of
the challenges presented by
the massive increase in data associated
with the trading function. Jeff Hudson,
CEO, Vhayu, the market data specialists, draws on the analogy of evolution
to bring home to the trading community
that a change in mindset will be needed
to operate successfully in the burgeoning
electronic marketplace.
Focusing on the evolution of consciousness rather than physical attributes,
he suggests that the role of ‘the carbonbased life form trader’ has more or less
run its course as the main participant in
today’s electronic marketplace.
“If you think about the ‘old days’, the
‘post-Mesozoic’ period, if you will, the trader would read the Wall Street Journal, look
at a ticker tape, talk to people on the phone
and would then make trades,” says Hudson.
“That doesn’t work anymore. We are now
at the point where markets have become so
large and so complex that traders have invoked silicon-based force multipliers.”
Without leveraging the force multiplier
effect of silicon chips, serious trading in today’s markets is not feasible, says Hudson.
That force is multi-dimensional, affecting
both speed and volume. “As a human, I
THE TRADETech DAILY—Paris 2008
“If I use a siliconbased machine
not only can I
trade 10,000 times
faster, but I can
trade 10,000 times
more.”
Jeff Hudson, CEO, Vhayu
can run 100 metres in 9.5 seconds, but if I
use a machine, I can do it in two seconds,”
says Hudson. “Similarly, I can trade only so
fast on my own, but if I use a silicon-based
machine not only can I trade 10,000 times
faster, but I can trade 10,000 times more.”
Human limitations
The market used to be defined as the sum
total of the players and their ability to
trade, says Hudson. “Now we have all the
force multipliers, we have super strong
players in the market that can trade so
much faster and so much more broadly
that the market is exploding, creating that
much more data.”
Human traders need to come to terms
with their limitations in such an environment, Hudson argues. In automated trading,
the human traders are the directors of the
machine, which acts as their proxy. The supervisory and feedback functions built in to
the system need to work at the same rate as
the machines that are trading. That realisation is starting to dawn on people, he says.
The way that machines are programmed
to trade is itself evolving. “Electronic trading has up to this point been more or less
equivalent to a reptilian response mechanism,” Hudson suggests. “It’s all about taking the most recent event and reacting to
it. If you look at a lizard, what it knows is
hardwired in. It has a reptilian response to
movement: opportunity or threat. That’s
what algorithms are doing today. They
look for movement and react.”
As consciousness evolves, says Hudson, other factors come into play. “We
start to take into account things like community and history. We make use of the
ability to remember the past; we recognise what’s going on, put it into a context
and make a plan for the future.”
For the moment, says Hudson, most
algorithms are reptilian – “They snap
at whatever moves” – but the new generation of algorithms will be able to learn
from experience, recognising and avoiding situations that in the past have led to
undesirable conclusions.
There is an evolution toward massive parallelism, says Hudson. Increasing
sophistication is being coded into algorithms to which the trader will need to
cede more of the actual decision-making.
“There’s still this notion that, ‘I am the
trader, I'm thinking up what to do and
I’m in charge’,” he contends. “But we’re
starting to see adaptive algos that adjust
themselves to current conditions, not
requiring the traders themselves to say,
‘Wait a minute, what's happening?’ That’s
the next stage: on-the-fly quant research
or on-the-fly alpha generation.”
Data churning
In short, says Hudson, we are creating
silicon traders. These systems will be
more adept at absorbing, analysing and
acting on vast quantities of data than
humans could ever be. “We as humans
are carbon-based. We cannot easily and
speedily discern the difference between
relevant and irrelevant data,” he says.
To humans, the amount of data being
generated by the use of force multipliers
seems overwhelming. Yet, says Hudson,
“If I could ask these 8-core Pentium ma-
chines, ‘Is this too much data for you to
handle?’ They'd say, no.”
The problem that the machines will
encounter is that the pathways to communicate all this information still need to
change. “The networks are too slow, but
there are people working like crazy to develop bigger and bigger pipes,” he says.
People need to shift their perspective,
Hudson concludes. “What gets people
from New York to Paris? Is it the pilot? No,
it’s the autopilot. We’ve trained it to understand its environment.” What does the pilot
do? “He watches to make sure nothing goes
wrong and that the autopilot does not encounter anything that is outside its corpus
of knowledge.” What is still irreplaceable
in human beings, says Hudson, is that “they
have the ability to react in a creative way to
a situation that nobody’s seen before.” That
is the human trader’s preserve. l
to learn more…
market data – Why it’s top
of the agenda and how you
can ensure the best data at
the best price
Wednesday 23 April – 17:20,
Stream A
Issue 1—Advance edition
page 17
trading technology
MiFID rings the changes for
electronic trading
With MiFID triggering market fragmentation, trading technology has to adapt
fast to keep pace with market demand
W
hat do buy-side traders need most from
their trading tools, how will they go
about getting it, and what will providers do to meet their needs? For algorithmic trading providers, one of the biggest problems faced is
the latency in their offerings resulting from a lack
of CPU power, according to Ralph Silva, managing director, securities and investments at research
and consultancy firm TowerGroup. “The number
of data elements informing algorithms is going to
increase over time,” notes Silva. Today, he contends, individual algorithms have some way to go
to match the number of simultaneous inputs that
can be handled by the computational power of the
human brain.
A number of emerging technologies have
the potential to make the trading process faster.
Some companies have set themselves to the task,
developing advanced CPUs and ‘protein-based
microchips’, according to Silva. However, he
suggests, the biggest opportunity for vendors
going forward lies in selling infrastructure-based
platforms that give traders the ability to create
their own algorithms using the coding elements
provided.
Silva also envisages the development of a
common trading platform for investment banks.
“On a trading floor in London or the US, different technologies are used running different types
of algorithms. Some traders will use Visual Basic [Microsoft’s event-driven programming language], while others – sitting three floors down
– will be using an Excel spreadsheet,” explains
Silva. This lack of a common trading infrastructure means that firms have no consolidated view
of the algorithms they use.
One problem with this is that traders within a
firm might often find themselves trading against each
other. “How many times have we known one trader
going after a counterparty who happens to be across
the desk?” asks Silva. By deploying a common trading
screen for each of their traders, rather than different
screens throughout, brokers can counter this problem, he argues.
To provide the buy-side with a greater sense of
control of outcomes, brokers are stressing the potential customisation aspects of their algorithmic
offerings. Yet according to The TRADE’s 2008
algorithmic trading survey, only 4% of buy-side
traders polled cited customisation features as important to them. According to Silva, this makes
perfect sense. Buy-side traders are not interested
in customisation provided by the sell-side, since
what they really want to do is build the algorithms
themselves.
Understanding cost
Transaction cost analysis (TCA) is also having to
evolve to cope with the market structure changes
that have taken place since MiFID went live on 1
November 2007. One of the most significant developments in this respect is in benchmarking. For
a buy-side firm sending an order to a broker to be
executed via a smart order router (SOR), liquidity-seeking algorithm or other ‘smart’ electronic
trading device, the need to apply a benchmark
“With each broker
using different liquidity
pools, it is hard to
find a common
benchmark against
which to evaluate their
performance.”
Vincent Burzynski, group marketing
and products director, GL Trade
“The number of data elements
informing algorithms is going
to increase.”
Ralph Silva, managing director, securities and
investments, TowerGroup
against which to evaluate the broker’s performance is paramount, says Vincent Burzynski, group
marketing and products director at electronic
trading solutions provider GL Trade. Accurate
broker evaluation is more challenging today than
it was in the pre-MiFID trading environment, according to Burzynski. “With a proliferation in the
number of liquidity pools available for traders to
access, using a VWAP benchmark will not be satisfying enough,” he explains.
VWAP has long been regarded as the de facto
standard in TCA analysis – widely used and easy
to understand. But with multiple liquidity pools
for trades to be routed to, VWAP will be different for each venue. “With each broker using their
own algo or SOR engine to access different liquidity pools, it is hard to find a common benchmark
against which to evaluate their performance,” explains Burzynski.
The problem is unlikely to go away. “Access to
dark pools of liquidity are in increasing demand by
buy-side traders,” comments Burzynski. Traders use
dark pools because they value the anonymity they
offer by not displaying their orders on the market,
he adds, thereby reducing market impact. The importance to traders of anonymity has been verified by
independent research. The TRADE’s 2008 algorithmic trading survey, based on interviews with over 150
buy-side traders, found that close to 22% of respondents cited ‘anonymity’ as a significant driver behind
the adoption of algorithms as part of their trading
strategy. “We need to discuss how important reducing market impact is for the buy-side and how it can
be improved,” notes Burzynski. l
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TradeTech_draft08b.indd 1
THE TRADETech DAILY—Paris 2008
19/3/08 8:28:29 am
Issue 1—Advance edition
page 19
Multi-asset-class trading
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Alpha comes
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130/30 strategies may well have freed
traditional managers from the stricture
of long-only investing but are not
without risk
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ith the European Union’s UCITS III Directive now permitting mainstream money
managers to replicate hedge fund strategies, the past few years have witnessed an increased
blurring of lines between traditional long-only fund
managers and specialists in absolute return products.
With institutional investors trying to boost alpha
in an era of low expected returns, one of the most
popular alpha generating strategies to hit the market
is the 130/30 fund. Also known as active extension
or short-extension strategies, the 130/30 vehicle gets
its name because 100% of the fund is invested long,
while the manager also shorts stocks up to a value
equal to 30% of the fund’s assets. The proceeds of
the short sale – stocks that are expected to underperform the market – are then used to buy stocks that are
likely to beat the index.
On paper, the merits of 130/30s seem clear, particularly for asset managers who believe a long-only
structure is restrictive, preventing them from making
money by targeting unattractive securities. The vehicle allows them to seek more alpha without having
to do any major reshaping of their asset allocation or
portfolio structure. “With a 130/30 product, you can
completely control your exposure by taking a short
position if necessary. You can get all of your views on
stocks into the portfolio, and go really long with the
ones that you really like,” explains Richard Lacaille,
head of global active equities, SSgA. “At the same
time, there is no worry that you are going to unbalance the portfolio and get exposure to sector risk. It
can be both a boost to performance but also allow
much better risk control.”
Despite short track records and the lack of data for
evaluating strategy and performance, 130/30 managers said they are encountering strong institutional
investor interest. The growing popularity of 130/30s
is confirmed by recent research which estimates the
investment strategy has, in the space of two or three
years, pulled in around $140 billion AUM, a figure
that is forecast to grow to more than $2 trillion AUM
in the next three years.
But despite this traction, the strategy is not without its critics, as delegates are likely to discover at
the TradeTech session devoted to 130/30 strategies.
Some industry experts, wary of the heavy marketing campaigns that have accompanied 130/30s, have
pointed out that the funds are extremely dependent
on the stock-picking skills of the manager and carry
potentially greater risks than long-only funds.
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THE TRADETech DAILY—Paris 2008
Email: tradetech@wbr.co.uk
Visit www.tradetechequity.eu
Last year, a Sunday Times article voiced the common
concern that 130/30s could prove troublesome for
traditional long-only fund managers who lack experience in shorting stock: “Buy a bad share and you can
only lose what you put in, but if you have gone short
you have to buy it back,” ran the article. “If its price
falls in the meantime that’s fine. You’ve made money
as you buy it back for less and pocket the difference.
But it could also rise, and rise indefinitely. You can
lose a lot more money this way.”
While acknowledging that shorting can be “unfamiliar territory” for some managers, Lacaille believes
the onus is on them to “demonstrate to clients their
shorting ability as well as their traditional ability.” He
also dismisses the accusations of marketing hype. “I
can understand where people are coming from, because it seems that there is a lot of institutions doing 130/30s all of a sudden and there is a bit of spin
around it, but there is actually a lot of substance.”
SSgA is the market leader in 130/30s. According
to Lacaille, the funds have a greater likelihood of
delivering alpha than a high-conviction portfolio of
concentrated stocks, those shares that fund managers
are convinced will either go up or down more than
the market. “Concentrated portfolios often come
“With the 130/30
business, investors
have an alternative to a
high-conviction portfolio
for the first time.”
Richard Lacaille, head of global
active equities, SSgA
with risks that in the current environment people
may not be particularly comfortable with,” he comments. From a risk perspective, but also in terms of
regulatory disclosure, it is becoming harder to find 20
or 30 stocks in Europe that are unambiguously going
to outperform. “Now, with the 130/30 business, investors have an alternative to a high-conviction portfolio for the first time,” adds Lacaille.
Some critics, however, suggest that 130/30s are
simply a variant of high conviction portfolios, since
most of the long part of the fund more or less tracks
the market, while the rest, both long and short, goes
into high conviction ideas. There is even a suggestion
that the funds are simply a scheme to generate higher
than usual fees – a notion that Lacaille rejects. “The
fees are in proportion to the alpha,” he insists. “From
a risk return perspective, 130/30 strategies are more
efficient than long-only. So although we are using our
capacity at a higher rate, we are delivering disproportionate amounts of alpha. We would rather do more
130/30s than we would long-only, not from the fee
perspective, but just because it is a more efficient way
of using the capacity that we have got.” l
To learn more…
130/30 investing: Putting some flesh
on the bones
Wednesday 23 April – 14:30,
Stream B
Issue 1—Advance edition
page 20
buy-side empoWerment
Alpha traders keep the
pressure on brokers
How far and how fast is ‘buy-side empowerment’ changing the buy-side/sell-side
relationship?
T
here is little doubt that the traditional roles of
buy-side dealer and sell-side sales trader have
blurred, as asset managers seek more control
over trade execution. Just how far, and how rapidly,
this evolution is taking place is still a matter of conjecture however, and a subject that will cut across several sessions at TradeTech.
The increasing amount of trading technology available to buy-side traders, including advanced order and execution management systems and, more recently, smart
order routing, is giving asset managers more control than
ever over the execution process and putting pressure on
the sell-side to innovate and offer new services.
“The empowerment of the buy-side has put quite
a burden on brokers,” observes Rob Boardman, head
of algorithmic trading at agency broker and technology firm ITG. “Not all broker/dealers are wellequipped to thrive in an environment where their clients are suddenly much more technologically savvy
than they used to be.”
For buy-side houses that actively manage investments rather than track indices, outsourcing execution
to brokers is not an option. Traders intent on achieving superior returns need an intimate knowledge of the
stocks and how they are traded, observes Jan Lamme,
global head of trading at ABN Amro Asset Management. “If you see the role of the buy-side dealer as part
of the portfolio management process, the dealer should
be familiar with how he needs to execute the equities in
the portfolio manager’s model portfolio,” he says.
To meet the demands of buy-side customers, brokers not only need to be highly technologically enabled, argues Boardman, they also need to understand
quantitative trading techniques.
Sell-side evolution
Brokers need to adopt a more consultative role now
that execution power is shifting to the buy-side, advises Larry Tabb, CEO of research and consulting
firm Tabb Group. “The role of the sales trader isn’t
to say, ‘do you want to buy or sell shares in Vodafone’.
It becomes one where they help the buy-side trader
understand the various tools the sell-side has at their
disposal, how to use them, and how to trade in a more
fragmented environment.”
Buy-side empowerment will only increase, predicts Tabb, particularly in Europe, where the advent
of MiFID is resulting in a greater choice of execution
venues and liquidity pools. “As the market becomes
more fragmented, the buy-side will generally take
greater control over how they execute,” he says, adding that this will involve the buy-side developing its
own algorithms and integrating with different dark
pools. “It won’t just be about delegating that order to
a broker or asking the broker for capital,” says Tabb.
“As the market
becomes more
fragmented, the
buy-side will
generally take
greater control
over how they
execute.”
Larry Tabb, CEO, Tabb
Group
to learn more…
the future of the buy- and sell-side
– where is the empowerment of the
buy-side leading?
Wednesday 23 April – 12:00
As well as changing the types of services brokers provide and how they provide them, the trend
towards greater buy-side empowerment could also
change the structure of the sell-side as a whole as
broking houses become more automated. “A broker
has got to have a good degree of automation on both
the sales side and the execution side,” says Boardman
at ITG. “I’m not forecasting that all brokers will have
far less people, but I think there will be fewer brokers
with more specialist staff who are more productive,”
he proffers, with sales traders’ input reserved for difficult trades, while the rest is automated.
Not only is the buy-side taking over more of the
roles traditionally performed by the sell-side – it is
also poaching the staff to perform them. “The role
of the buy-side trader is increasingly being filled with
ex-sell-side people,” notes Tabb.
Cultural shift
The trend towards greater buy-side empowerment is not
universal, however. Although in general the buy-side is
taking greater control over the execution process, some
asset management firms only pay lip service to the notion
of empowering buy-side traders. “They have an order
management system and think that’s the end of the road,”
says Boardman. The support of senior management for
the trading function from a risk management or skill-set
point of view is critical, he argues, and is often missing.
“It’s a decadelong trend.
There were
early adopters
at the start of
decade; it will
be early into
the next before
the majority
of investment
institutions
are trading
themselves.”
Rob Boardman, head of
algorithmic trading, ITG
THE TRADETech DAILY—Paris 2008
gral to the portfolio management process, will continue
to outsource the execution component to brokers.
Buy-side desks that want a more active role in the
whole asset management process will have to fight for
it. “You can get recognition by telling the firm you are
going to assist them in beating their benchmarks and
take responsibility for it,” says Lamme. “On buy-side
dealing desks in general, taking responsibility is not
one of the easiest things to do,” he suggests. “Historically, they are more bookkeepers than traders, with
benchmarks agreed with the portfolio managers.”
There is still work to be done before the whole
buy-side community can be described as ‘empowered’.
“It’s a decade-long trend,” says Boardman. “You saw
early adopters at the start of decade; it will be early into
the next before the majority of investment institutions
are trading themselves.” l
Although technology is credited with empowering
the buy-side, the ability to seize control of execution is as
much about company culture and strategy as it is about
available technology. Lamme at ABN Amro points out
that firms who do not believe they can derive any value
from
execution,
and do not
see the dealing
desk Page
as inte-1
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Issue 1—Advance edition
page 21
market fragmentation
Master class in
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When it comes to fragmentation, Thomas M. Joyce, chairman
and chief executive officer, Knight Capital Group, believes
that Europe has an advantage in coming later to the game.
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“In an increasingly fragmented marketplace,
buy- and sell-side firms want sophisticated
algorithms that facilitate anonymous and efficient
trading.”
Thomas M. Joyce, chairman & CEO, Knight Capital Group
T
Introduction
The algorithmic
revolution – what is it,
who’s in it and where
is it heading?
Part 1: Adopting an algorithmic
strategy
Chapter 1: The role of algorithms in the
overall trading mix
Chapter 2: Integrating algorithms into
the order management
system
Chapter 3: Integrating algorithms into
the execution process
Part 2: Algorithms in action
Chapter 4: Algorithms – limits and
possibilities
Chapter 5: Algorithms to help you trade
aggressively
Chapter 6: Dark pools and algorithmic
trading
Chapter 7: Regional differences in
algorithmic design
Part 3: Quantifying and measuring
performance
Chapter 8: Overcoming the challenge of
assessing execution quality
Chapter 9: Algorithms, trading costs
and order size
Chapter 10: Execution consulting
Part 4: Innovation in algorithmic
design
Chapter 11: Algorithms for FX
Chapter 12: What will the next
generation of algorithms
offer?
To order your copy or for further information:
Tel: +44 (0)20 7400 7100
Fax: +44 (0)20 7404 7111
Email: francoise@thetrade.ltd.uk
THE TRADETech DAILY—Paris 2008
homas M. Joyce, chairman and chief executive officer of Knight Capital Group, will be
addressing TradeTech in Paris on the lessons
that Europe can learn from the market evolution in
the US, covering technology, regulatory impact and
the changing market structure.
To address the issue, Joyce plans first to set out
the changes as he sees them in terms of what US
market participants have had to face. In January,
Knight itself announced the acquisition of EdgeTrade, a leading agency-only trade execution and
algorithmic software firm that allows buy- and sellside clients to source liquidity and manage the trading process while maintaining anonymity, reducing
market impact and lowering transaction costs. “In
an increasingly fragmented marketplace, buy- and
sell-side firms want sophisticated algorithms that
facilitate anonymous and efficient trading,” Joyce
noted at the time.
Constant change
Although the pace of liquidity fragmentation has accelerated over the past year, Joyce points out that the
process of eroding the exchange monopoly on order
flow began well over a decade ago with the introduction of Reg ATS and subsequent reform of order handling rules.
The first part of the talk will show how the regulatory changes and attendant product innovations have
led to greater efficiencies over time, but not without
challenges along the way.
Market participants in the US have not necessarily greeted each change with universal approval.
Joyce points out that Reg NMS, for example, was
approved by the SEC with a “razor-thin margin”.
There remain obvious technical challenges related
to NMS, he suggests, “in particular, the explosion in
messaging traffic.”
Europe can benefit from its relatively late start in
fragmentation, where national exchanges still dominate the trading landscape. Participants, he suggests,
should take advantage of the opportunity to prepare
ahead of time – an option not available to their US
peers.
He does not, however, expect an equivalent mushrooming of liquidity venues as the US has recently
experienced. The current clearing and settlement
infrastructure in Europe, which is itself fragmented,
could not support such fragmentation without further reform, he argues. For markets to take full advantage of MiFID, further reform of infrastructure
will be necessary. Nevertheless, he suggests, although
there will inevitably be pitfalls, drawing on the US
experience will make it easier for Europe to get to
grips with the challenges ahead.
Joyce is well placed to describe these challenges.
He joined Knight in May 2002 from Sanford C. Bernstein & Co, where he served as global head of trading.
He is a former member of the Nasdaq Group Board
of Directors and has been a director on the boards
of the Security Industry Association (now SIFMA)
and Archipelago. He is also a former member of the
NYSE’s Market Performance Committee and of the
Merrill Lynch Europe Executive Committee. l
to learn more…
the us perspective: What europe
can learn from the us marketplace
Wednesday 23 April – 13:55
Issue 1—Advance edition
page 22
exhibition
The main event
Firms compete for top billing
T
he second annual TradeTech awards dinner and role of honour presentations will take place at 20:15 on 23 April at the CNIT Centre. A cocktail
reception will be held before the dinner.
Following feedback from last year’s attendees, the number of categories has
been pared back from 12 to eight. “People attending the ceremony last year said
they would have preferred fewer categories because they wanted to spend more
time enjoying the dinner with their peers than listening to and watching formal presentations on stage!” comments Yasemin Karaman, the event organiser
at WBR.
The categories this year will be: best buy-side use of advanced trading tools;
best sell-side alternative execution service; best buy-side order management system (OMS); best sell-side OMS; best execution management system (EMS); best
overall data provider; best overall execution venue; and buy-side achiever of the
year award.
Companies hoping to be shortlisted for a nomination had initially to submit
a 500-word statement, indicating why they thought they should win the award.
“Many also provided supporting materials including press releases and client testimonials to advance their case,” remarks Karaman. The deadline for companies
to submit their nominations was 20 February.
To guarantee the audience are kept entertained, Omid Djalili, a well-known
British stand-up comedian and actor, will compère the event. In addition to his
NYFIX promotes Euro
Millennium
SOR and algos top Merrill
Lynch’s agenda
Newly launched European dark liquidity pool
unveiled
Bank wants to simplify client access to
products
N
errill Lynch’s smart order routing (SOR) and enhanced algorithmic offerings top the list of products the firm will be discussing with clients
and delegates at TradeTech, according to Yvonne Hansmann, head and
managing director of EMEA trading sales at Merrill Lynch. “We are continuously
enhancing our algorithmic products and have lots of customisation strategies,” she
says. “Our customers don’t just want off-the-shelf solutions.”
Other issues Merrill Lynch will be addressing include the search for liquidity,
global reach, traditional sales trading and commission sharing agreements. The
notion of simplifying access to products is a particular priority for the bank. “We
work hard to make our products easy to use and to integrate them seamlessly into
all the multi-broker front-ends,” says Hansmann.
Merrill Lynch sees its exhibition stand as a useful forum for discussion with its
buy-side clients. “Our idea with the stand is that it is more a meeting point than a
demonstration stand,” says Hansmann. She adds, however, that TradeTech often
tends to serve as a venue for initiating discussions that can then be followed up
with one-to-one presentations. l
YFIX, a provider of community-based electronic trading solutions,
launched Euro Millennium, a dark liquidity pool for pan-European listed
equities, on 17 March. The firm will be using the TradeTech exhibition
as a platform to generate further interest in Euro Millennium, explain how the
service works and how clients can use and connect to it.
Euro Millennium is open to both buy- and sell-side traders and uses the same
technology as NYFIX Millennium, a US dark pool that has been in operation for
the past seven years.
An advisory board made up of both buy- and sell-side market participants
worked with NYFIX for a year to help the firm develop Euro Millennium. “It
was based on the US version but modified for the European markets,” comments
Chris Smith, director, NYFIX International. Members of the advisory board
included Allianz Global Investors, Baring Asset Management, JPMorgan Asset
Management and Schroder Investment Management.
Broad range
“Some of the firms on our advisory board were vocal about wanting us to post
small-cap stocks on the system as well as blue chips,” comments Smith. As well as
being open to both buy- and sell-side participants, it can be used to trade blocks,
small orders, and small- and mid-cap stocks as well as blue chips. Euro Millennium
currently matches UK-listed equities and will be rolling out other major European
markets over the course of 2008.
Delegates will be able to learn more about Euro Millennium and the range of
services offered by NYFIX at the firm’s stand. Smith will also be giving a presentation entitled ‘Dark versus light – exploring European trading strategies’ at 14.30
on Wednesday 23 April. l
Chi-X celebrates its first
anniversary
MTF to provide statistics and updates of its
first full year of operation
C
hi-X Europe, the pan-European multilateral trading facility (MTF) majority-owned by Instinet, will be celebrating its first full year of live operation at this year’s TradeTech.
Chi-X’s history is closely tied to the event. At TradeTech 2006, Tony Mackay,
president and managing director of Instinet Europe, revealed that a new trading
platform was in the pipeline. At the following year’s event, Mackay was back on
stage to discuss the platform’s launch at the end of March 2007 and its initial
performance.
This year, the company will have a full year of operation to draw on and will
be providing updates on its performance from its exhibition booth at TradeTech.
According to Peter Randall, CEO of Chi-X Europe, the figures will show a platform experiencing steady growth, with institutions of varying size making use of
its trading capabilities.
Chi-X is keen to expand participation still further. The MTF’s main message at
the event will, says Randall, be ‘Best execution? Best check Chi-X’. He will be giving a presentation with that title on the first day of the main conference. “There are
around 50 participant firms now on Chi-X,” Randall notes. “If only those are checking Chi-X, many others aren’t checking it and are not getting best execution.” l
THE TRADETech DAILY—Paris 2008
stand-up show, Djalili has starred in Notting Hill, Pirates of the Caribbean, The
World Is Not Enough and Gladiator, as well as every episode of Alexei Sayle’s
Merry-go-round. l
M
Linedata connects to
research management
platform
LongView users can now access Norbury
Links research
L
inedata Services will announce at TradeTech that its LongView Trading order management system (OMS) now offers users access to Norbury Links,
a research management platform developed by Norbury Financial Systems.
Norbury Links helps users to screen and organise financial research.
The system will offer LongView users access to research that relates directly to
their holdings, helping them make better-informed investment decisions, according to Norbury Financial Systems.
At the same time, the alliance helps Norbury reach the LongView Trading
user base, which includes 10 of the top 25 asset management firms by assets under
management.
“Our alliance with Norbury should help reduce clients’ paperwork and tackle
the problem of information overload relating to identifying, sourcing, and accessing relevant investment research,” comments Jack Wiener, executive vice president in charge of business development at Linedata Services in North America.
The applications are integrated in such a way that users can switch from one
screen to the other at the touch of a button. If, for example, a user reviewing
information about a specific company in Norbury decides to buy or sell shares
in the company, they can press a button and be taken to the specific order screen
in LongView with the company already in the input field. Conversely, if a client
decides to add commentary on a security’s position they have seen in LongView,
they can press a button and be taken to the appropriate screen highlighting the
company research in Norbury. l
Issue 1—Advance edition
page 23
TIME OFF
in Paris
getting around
parisian high life
The easiest way to travel around
Paris is on the métro, with 372
stations spaced an average of
500m apart. Look for the green
Metropolitain signs! The métro
has 14 lines, each marked by
a number, colour and with a
final destination (similar to the
London underground system).
Most services begin at about
05:30 until around 00:30 (later at
weekends).
The invention of Gustave Eiffel, a French structural
engineer, the Eiffel Tower was built between 1887 and
1889, originally intended as a temporary exhibit for the
1889 World Fair. It took approximately 20 months to
construct the Tower, at which point it was the world’s
tallest building at 321 m. It shrinks up to 15 cm in cold
weather when the iron and rivets contract!
The RER is the suburban rail
service, which has five lines (A
to E) passing through the city
centre and connecting with
the metro. Trains run every 12
minutes from 05:30 to midnight.
Paris also has three tram lines,
which go to the suburbs, and
buses running from 06:30 to
20:30 with a reduced Sunday
service. Noctilien night buses
run after the métro closes, with
27 routes covering most of the
city.
An alternative way to see Paris
is form the River Seine on a
batobus river shuttle. Services
are every 35 minutes, 10:00
to 19:00, stopping at the Eiffel
Tower, Musée d’Orsay, the
Louvre, Notre-Dame and the
Hôtel de Ville.
Condemned as an ‘eye-sore’ by Parisians following its
construction, the Tower became a popular attraction, with
people coming from all over the world to visit it even when
the World Fair was over. It provided inspiration for artists
and the decision was taken not to have it demolished in
1909 as previously planned.
The 7,000 tonne structure affords a stunning 360degree view of Paris and is the world’s most popular
tourist attraction, with about 250 million people having
ascended it to this date. Its position in the French skyline
is synonymous with Paris for millions of people.
nightlife
Clubs
Le Caveau de la Huchette
5 rue de la Huchette
Tel: +33 (0) 1 43 26 65 05
Come here for jazz music from 21:00, but if you want to stay on
for swing, rock and R&B it is played after 02:00. The club boasts a
“funky cellar ambience” and will set you back between €11 and €13
at the weekend.
Métro: Saint-Michel
Le Balajo
9 rue de Lappe
Tel: +33 (0) 1 47 00 07 87
eating out
The Jules Verne Restaurant
Champ de Mars
Tel: +33 (0) 1 45 55 61 44
For a meal with a view, try lunch or
dinner on the 2nd level of the Eiffel
Tower. Make your way up in a private lift,
and enjoy dishes such as puff pastries
filled with crab and shrimp cream,
lobster or langoustines. For those who
prefer meat, sample the oven-baked
veal or veal rib steak with mushrooms.
Choose from the a la carte menu or a
set lunch or dinner menu.
Try this venue for a wide variety of music styles, from salsa to rock,
R&B to DJ evenings. On Sundays from 15:00 to 19:00, it hosts a
musette, which includes old-time tea dancing.
Métro: Champs de Mars-Tour Eiffel or Bir
Hakeim
If you are feeling fit, you can shun the lifts and climb the
1,792 steps to the top, then admire the views when you’ve
caught your breath. There are restaurants on two of the
three viewing platforms, Altitude 95 on the 1st level and Le
Jules Verne on the 2nd level.
Admission is from €10, 21:00 to 02:00 Tuesday to Thursday; 23:00 to
05:00 Friday and Saturday.
Pierre Gagnaire
At night, the Tower lights up with the help of 20,000 gold
light bulbs, which took 25 mountain climbers five months
to install! You may prefer to visit the Tower at night, as the
queues are shorter.
Bars
Métro stops for the Eiffel Tower are Champ de Mars-Tour
Eiffel or Bir Hakeim.
For cocktails such as the Kashenka, a mix of vodka and strawberries,
or the Benderitter, which is a blend of champagne and ginger extract,
expect to pay €20. Sit back and enjoy the leather armchairs, wood
panelled walls and intimate atmosphere.
The Salon des Réalités
Nouvelles
The Salon des Réalités Nouvelles (new realities) was
a society set up to exhibit pure abstract art, founded
in Paris in 1939 by Sonia Delaunay and others. It was
re-established in 1946 after World War II and continues
today in April each year. In the Parc Floral de Paris, over
400 established and developing artists come to exhibit
examples of their abstract works.
Métro: Bastille
Bar Hemingway
Hotel Ritz Paris, 15 place Vendome
Tel: +33 (0) 1 43 16 30 30
18 rue Troyon
6 rue Adival-de-Coligny
Tel: +33 (0) 1 42 92 00 24
Tel: +33 (0) 1 43 80 40 61
This bar is virtually on the doorstep of the Louvre, a fashionable and
popular place to enjoy a relaxed drink or a meal, or just to read the
newspapers during the day.
Described as a chic bar playing the latest music, the clientele here
are mainly young and trendy. Not the place to come if you want a
quiet drink and a chat! Try traditional Moroccan food and drinks in
the restaurant.
Tel: +33 (0) 1 42 74 22 77.
Take the métro to Châtelet or the RER to Châtelet-Les
Halles.
Métro: Charles de Gaulle-Etoile
Guy Savoy
Theatre de la Ville
Find the theatre at 2 place du Châtelet, 75004.
Situated near the Champs Elysees, a
meal here is expensive but worth it!
Dishes include suckling lamb with green
papaya and turnip veloute thickened
with Tarbais beans, or wild sea bass
slices with marmalade of slightly acid
fennel. The chef is renowned for his
Grand Dessert, consisting of seven
different dishes… leave some room!
Le Fumoir
Métro: Louvre Rivoli
Admission is €17.50 to €26. Productions are from
Tuesday to Saturday at 20:30 with a Sunday matinee at
17:00.
Tel: +33 (0) 1 58 36 12 50
Métro: Concorde or Madeleine
The parc is really a botanic garden, with its Vallée des
Fleurs, a pine forest and butterfly garden. It is open from
09:30 to 17:00, and will set you back €3. Take the métro
to Château de Vincennes.
From 9-27 April, you can experience a theatre-circus
production from James Thiérrée. The show is a mix of
mime, dance, circus, clowning and aerial acrobatics, and
returns to the theatre after a successful run in 2007.
Hotel Balzac, 6 rue Balzac
La Casbah
18-20 rue de la Forge-Royale
Tel: +33 (0) 1 43 71 04 39
Métro: Ledru-Rollin, Faidherbe-Chaligny.
Café de l’Industrie
16 rue Saint-Sabin
Tel: +33 (0) 1 47 00 13 53
Located near to the Opera de la Bastille, here you will find reasonable
prices, Parisian food and delicious cocktails. Enjoy live jazz on
Monday, Tuesday and Wednesday from 21:00 until midnight.
Try the artichoke soup with a layered
brioche of black truffles and wild
mushrooms, followed by poached blue
lobster served with pureed carrot and
star anise, or sea bass with spices. For
dessert, sample the chocolate cake
layered with praline and chicory cream.
Métro: Charles de Gaulle-Etoile
Spoon, Food and Wine
14 rue de Marignan
Tel: +33 (0) 1 40 76 34 44
The menu here includes dishes from all
over the world, some of which you can
create yourself by matching sauces to
courses. Choose pumpkin soup with
paprika and fromage blanc, grilled
squid, or veal breast with polenta and an
orange sauce. Save room for a chocolate
pizza or exquisite strawberry ice cream.
Métro: Franklin D Roosevelt
Métro: Breguet-Sabin, Bastille
Published by
THE TRADETech DAILY—Paris 2008
www.thetrade.ltd.uk
www.thetradenews.com
Editor & Publisher: John Lee +44 (0) 20 7400 7101 john.lee@thetrade.ltd.uk Deputy Editor: Ben Dyson +44 (0) 20 7400 7106 ben.dyson@thetrade.ltd.uk Consulting Editor: Richard Schwartz +44 (0) 20 7400 7102 richard.schwartz@thetrade.ltd.uk
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Issue 1—Advance edition
page 24
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BARC.L
RBS.L
VOD.L
HSBA.L
LLOY.L
HBOS.L
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