The realities of executing in today's high speed markets

By WillWinzor-Saile, electronic execution product specialist at Fidessa

The electronic executionlandscape has undergone a steady transformation. The underlying infrastructure providesessential functionality, but few brokers see it as a means of gaining competitiveadvantage. Today’s differentiators are found higher up the chain: sophisticatedalgos, execution consulting capabilities and other innovations. Howeverexecution is something that brokers have to get right, and getting it right hasbecome a lot more difficult.

The costs associatedwith execution have ballooned during a period when brokers’ margins are alreadyunder tremendous pressure. The execution landscape has become far more complextoo. Electronic trading has spread into new regions and new asset classes, eachwith their own regulatory dimensions. The increasing need to be everywhere andsupport everything, but do this in a controlled and consistent manner, willdefine the battle for supremacy between global and super-regional brokers.

The last decade has seena staggering proliferation of new venues around the world, all of which comereplete with their own subtleties and idiosyncrasies. Additionally, each venue typicallymakes one or two mandatory upgrades a year – that alone means brokers arerunning pretty hard just to stand still.

A new regulatoryconsensus with a focus on transparency is compounding the issue. The regulators'belief that lit markets are good and over-the-counter bad means trading is being pushed ontothe former. This will put further pressure on margins and accelerate the spreadof electronic trading to new asset classes.

In the US the plans to moveOTC derivatives trading onto exchanges has resulted in the creation of morethan 20 SEFs (Swap Execution Facilities) since 2013. At this stage brokers haveno way of knowing for sure which will make the cut, so they need the flexibilityto switch in and out of new markets with speed and ease, and the ability totest the waters with minimal risk.

With a number ofEuropean reforms underway, such as Mifid II, execution quality has been placed firmlyin the spotlight. Brokers will need to make major changes to their executioninfrastructure in order to support new monitoring, control and transparency requirements.

Because this shift has beengradual, many brokers’ electronic execution capabilities evolved in a patchworkmanner. Market access infrastructure has been bolted together piecemeal asfirms have expanded their capabilities. The upshot is a multitude of systemsunderpinned by different technologies, duplicating routes to market in someareas, and failing to provide any route in others.

This approach simply nolonger suits the vastly different trading environment that brokers now findthemselves in – it’s time for a new approach. 

Time for a rethink

So what should lie atthe heart of this new approach? Brokers need to provide their buy-side clientswith globally consistent trading behaviour. At the same time they need to beable to deliver their unique selling points through this client experience. Performance, reliabilityand cost are all part of the mix too. 

In today’s marketplace, the pursuit of consistency is key. This means creating a single, unified executionlayer across the business that insulates the trading function from everythingunderneath it. No matter the geography or jurisdiction, clients should enjoy auniform trading experience.

This requires a systemthat understands the regional nuances as well as the specifics of the market. Forexample, it needs the ability to create synthetic order types on exchangeswhere an order type is not supported.

Achieving consistency ona global scale with reliable performance is harder still. Historically, firmshave tended to view performance in one dimension – like a 100m sprint – chasingfaster speeds, sometimes at the expense of other factors. But as execution hasbecome commoditised, other factors have come to the fore.

Firms are realising thatexecution is in fact a multi-discipline event, more akin to a decathlon. Yes, speedis important: you’re not going to win unless you can run fast, but a successfuldecathlete needs to be much more rounded, able to outperform in a number ofdifferent disciplines. 

Brokers are starting to treatexecution performance in a similarly multi-dimensional way. The ability to be on time every time is farmore important than the ability to be fastest on the field under time-trial conditions.If some orders take tens of microseconds and others take thousands, then it isimpossible to define a reliable execution strategy. Latency needs to beconsistent, regardless of throughput.

Latency measures mustalso take into account the entire process. For instance an order can't go tothe market without undergoing risk checks. A market gateway that takes a coupleof microseconds is of little use if the risk checks in front of it amount toseveral milliseconds.

Reliability is part ofthe puzzle. Brokers need to be able to rely on their infrastructure day-in,day-out. A patchwork of electronic trading infrastructures seriously increasesthis type of risk.

Cost is another dimensionto consistency. It becomes very hard to control cost when it's spread acrossmultiple vendors. Whether or not these silos remain at the organisationallevel, there's huge scope for reducing fixed costs by collapsing them at thetechnology level.

And control is crucial. Historically,many brokers have wished to deploy their own competitive differentiation aroundtheir electronic execution desks. Unfortunately the proprietary nature of theseservices has led firms into either having to build out their own executionlayers or build multiple connection points into third-party systems. This callsfor the ability to plug these services into a single control surface so thattheir competitive differential is maintained without the exorbitant cost ofmanaging the market access complexity.

A new foundation

Many brokers – scaleplayers in particular – will soon find themselves struggling if they fail toact. Those that don’t adapt will be smothered by a perfect storm of cost,regulation and inefficiency.

While thecommoditisation of the execution layer means that it is the innovation on topthat affords the real competitive advantage, failing to get execution rightwill render this impotent. Commodity or not, powerful, comprehensive, reliable,smart and consistent execution will remain a crucial ingredient for those firmsthat truly want to compete on a regional or global scale.