On the back of technological innovation and regulatory pressure for best price and best execution, exchanges such as the Toronto Stock Exchange (TSX) have suddenly found recognition from global market participants whose orders are being routed cross border nearly seamlessly.
At a lunchtime roundtable hosted by the TSX on Wednesday, panelists universally agreed if one innovation is to be most lauded for globalizing the securities markets it is the emergence of the algorithmic trading model. “A couple of forces are at work here to cause algorithms to be more important: MiFID in Europe and Reg NMS in the United States,” explains Jeffrey Hudson, CEO, Vhayu Technologies, a firm that deliver software solutions to financial institutions for the capture and high-speed analysis streaming and historical data. “The key in both cases was that regulators wanted to ensure best execution of trades. This requires all potential venues where a stock can be traded to be swept for best execution.”
“The best algorithms are the ones that understand all of the liquidity pools, from the most highly visible to the unknown,” says ITG Canada’s Director, Sales and Trading Doug Clark. “We base our algorithms on historic trade distribution. Most trades have been done on the NYSE, so most orders will be sent there now. But you are going to have smart algorithms that are focusing on best price.”
Indeed, the exchanges recognize the potential for more business and have taken steps to help ensure orders get routed in their direction. “Fees in Canada are very low to make our position more competitive,” says Robert Fotheringham, vice president, Structured and Derivative Products at TSX Markets, who points to various technological improvements the exchange is also undertaking to be more attractive on a global scale including the implementation of FIX standards and improved customer connectivity. “We are working with vendors to improve the trading access to our markets, vendors are key in developing these markets.”
In turn, vendors are eager to work with TSX to develop a comprehensive trading platform for their clients. “One of our core focuses is to bring all of the world’s markets to a single platform. We are moving to a new era where the borders become meaningless so the algorithm will be taking into account what is happening in other markets across the globe,” says Eric Stoop, president of Nexa Technologies.
“We have customers that trade 24 by 7. So geopolitical borders are becoming less meaningful,” confirms Hudson.
The capabilities may be in place to handle an increase in trading volume from the exchange perspective, but as more transactions are affected from different parts of the world, the clearing and settlement functions still have very real borders attached to them in no small part due to the regulatory regimes depositories are domiciled in. While one country may only require participants be registered in an omnibus account, another may require final beneficiary owner (FBO) detail at the depository, creating headaches for otherwise willing market participants. “The clearing issue is the least talked about and least understood,” says ITG Canada’s Clark. “A lot of people don’t understand that is what is going to be holding this whole process back, not the trading.”
“It is one thing to say we can execute a trade on a single platform on the LSE [London Stock Exchange] and send a similar message to the TSX,” adds Stoop. “It is another can of worms to make available to the customer a single account.”
It is with these concerns that led Nexa Technologies to develop a technology solution to accommodate a more multi-locale trading environment, says Dan Son, president of Penson Worldwide, Inc-the parent company of Nexa Technologies. “We have established clearing programs in US, Canada, and UK with clearing facilities throughout Europe and Asia. With the enabling of the Nexa platform to allow trading in various markets we develop an infrastructure to settle trades in appropriate markets and provide FX transactions where necessary or leave currency in balances depending on the decision of the customer. In this way, we take care of the background.”
Further, adds Nexa’s Stoop: “We have developed the extra module to present a virtualized single account even if you are looking at multiple accounts,” adds Stoop. “We have done this in the US, Europe and UK where a single model is sharing information across different accounts being held in different jurisdictions.”
Yet, the technology can only go so far. “Until you get to the point where it is no longer the customer dealing with these custodian issues it is not going to take off like we hope it will,” says Stoop. “With more trades being done cross border, you end up with a process where there is no end of day. These traditional end of trading day concepts we have lived with forever are going to have to evaporate before you can move forward.”
“For example, something like 20% of all international trades require manual override. But that can’t happen if a trader in Singapore enters a trade in London, where required manual override leads to failed trades.”