OCC has welcomed Josh Woods, Citadel Securities’ Chief Technology Officer, to its Board of Directors. Woods has nearly 20 years of experience in finance and technology. At Citadel Securities, Woods leads technology teams that design and build the cutting-edge systems that power global trading and keep the firm at the forefront of finance and technology. Woods was previously a Senior Director of Engineering at Oracle.
Roz Smith
Broadridge Financial Solutions has appointed Roz Smith as Chief Operating Officer of Broadridge International, based in London. Prior to joining Broadridge, Smith spent 18 years in management roles at HSBC, where she most recently served as Head of Strategy and Change Management in the Non Financial Risk team of the bank’s Markets & Securities Services business.
Marcus Robinson has been appointed Head of CDSClear and Head of DigitalAssetClear. The appointment follows Frank Soussan’s, formerly Global Head of CDSClear and Head of SA EquityClear & CommodityClear, decision to leave the Group. Robinson, previously Head of Strategy for LSEG Post Trade, will lead CDSClear in the next phase of international expansion, particularly across the US.
CLS, a financial market infrastructure group delivering settlement, processing, and data solutions, has appointed five new members to its Board of Directors. The new directors on the Board are Teddy Cho (BNY Mellon), Scott Lucas (JP Morgan Chase), Akila Raman (Goldman Sachs), Peter Whitelaw (National Australia Bank) and Michael Lawrence (Independent / Outside Director).
JPMorgan Chase has tapped Sri Shivananda as its new firm-wide technology chief, according to a memo seen by Banking Dive. Shivananda will succeed A.J. Lang, who will retire after six years with the company. Shivananda will report to the bank’s global chief information officer, Lori Beer.
If you have a new job or promotion to report, let me know at alyudvig@marketsmedia.com
In some of our recent posts, we’ve talked about how trades move between venues at close to the speed of light. We have also highlighted that speed is different for fiber and microwave transmissions. Data also suggests that some venues tend to set prices while other venues mostly peg to those prices. In fact, the evidence suggested that primary listing venues contribute much more to price discovery than other trading-only venues, quotes matter more than trades, and dark markets contribute almost nothing to price discovery – even when they trade – as they are pegged to price-setting venues’ prices.
This is especially important in a region as big as Europe. The time it takes for price updates to travel around such a large region means pegged prices will update a (relatively) long time after the actual prices have changed. That gives trades with microwave connections an even bigger advantage.
It’s even more important to European regulators if they’re still considering using the consolidated tape as a pre-trade price to peg prices and/or to make routing decisions.
Stale pricing found to impact dark pool executions
Given all this, it should come as no surprise that a recent study looking at U.K. dark pools found “a substantial amount of stale trading [in dark pools] occurs.” This finding has been replicated extensively across Europe, with research from Euronext, SIX Swiss and Deutsche Börse finding similar results.
You might say, “So what?” After all, a different study in the U.S. found that even though price dislocations could be seen on the U.S. consolidated tape, when the researcher accounted for the time that it would take to send trades back to the venues with dislocated prices, the “latency arbitrage” opportunities were mostly gone.
Dark pools peg to primary prices
Dark pools in Europe don’t (by definition) publish prices pre-trade. They usually aim to match buy and sell orders at the midpoint of the primary best bid and offer (PBBO). This makes use of the so-called reference price waiver.
Keeping orders in dark pools without pre-trade transparency (public quotes) helps a buyer “hide” their demand, reducing price impact from signal-driven traders.
However, we also know that hidden orders have higher opportunity costs, via lower probability of execution. That’s why dark pools are more attractive to larger, patient investors.
Fast traders are (almost) always right
What’s a little different about the U.K. study, though, is the research found that arbitrageurs frequently take dark liquidity when stale prices exist. The U.K. study finds that the arbitrageurs are on the winning side of the execution between 96 and 99 percent of the time (see Chart 1).
Importantly, because the fast trader always seems to be on the “informed” side of the spread, the research concluded that these stale prices were “imposing large costs on passive dark pool participants.”
Chart 1: Participation in stale trades: Winners and losers
Tracking latency arbitrage in dark pools: An example
Let’s look at an example of how this works for a hypothetical stock listed in Stockholm and trading in Nasdaq as well as in a London-based dark pool.
1. At time = 0 milliseconds (No activity, all markets in sync)
The market is in a steady state with the PBBO midpoint of €11, which is reflected in the Nasdaq data center located in Stockholm as well as in the London venue. A natural sell order is sitting in the London dark pool.
Chart 2a: At t = 0ms (market in steady state with a price of €11)
2. At time = 1 milliseconds (price discovery in Stockholm)
Price discovery happens in Stockholm when a buyer sends an order to lift all shares on the offer (PBO). That leads to a change in the PBBO midpoint to say €12. Information about the trade as well as the new PBBO midpoint starts its journey to London both via microwave and fiber connection; however, as we know, microwave is faster, so after 1ms, that update is closer to London than the Fiber message.
Note that at this time, only traders in Stockholm know that the trade has occurred, and the PBBO midpoint has changed.
Chart 2b: At t = 1ms, only traders located in Stockholm know the market is now higher
3. At time = 9 milliseconds (Arbitrageur trades arrive in London before updated midpoints)
The information arrives in London via the faster microwave connection where an arbitrageur who, knowing prices have gone up in the primary, seeks to buy all dark liquidity at the stale old (lower) midpoint price, resulting in a loss of €1 for the natural seller.
Chart 2c: At t = 9ms, traders using microwave can sweep London dark venues, hoping to buy at the old lower midpoint
4. At time = 10 milliseconds (Back in sync)
Fiber connections tell dark pools that the new mid is €12, and the midpoint peg reference price is adjusted. Both Stockholm and London prices are back in sync.
Chart 2d: At t=10ms, London dark pool updates the PBBO midpoint after receiving the PBBO midpoint update on fiber
In less than the blink of an eye (literally), lit prices updated to €12, and then dark pool trades occurred at the old €11 midpoint.
The fast arbitrageur can generate an instantaneous profit by selling at the potentially higher new bid while buying in the dark pool at the old midpoint. Chart 3, which is from the London study, illustrates this for a U.K. stock where a buyer-initiated dark trade prints at the older midpoint (£30.235), allowing the arbitrageur to sell at the new bid (£30.25) and make an instantaneous profit (£0.15).
Chart 3: A view of prices and fills across time shows dark prints at old prices, below the new bid (taken from Fig.6 in Aquilina, Foley, O’Neill and Ruf, 2023)
We find the same seems to happen in Nordic markets
We replicated some of the analyses from the U.K. study in Nasdaq Nordic markets. Specifically, we looked at companies in the OMXS30, OMXC25 and OMXH25 indices for the period from October 2022 to April 2024.
First, we know that around 60% of all EBBO updates for Nasdaq Nordic listings originate on Nasdaq (see Chart 4). That indicates that prices are mostly set in our Stockholm data center, which is around 10ms by fiber from the majority of U.K.-based dark venues.
Chart 4: EBBO setting frequency
We compared six dark pools to Nasdaq’s Nordic-at-Mid. Together, they account for an average turnover of €4.7 billion per month and almost 100% of executions in dark pools using the reference price waiver.
We find that:
30% of all dark pool trades, excluding Nordic-at-Mid, were executed at stale prices.
€17.1 billion or 23% of total turnover in dark pools is executed at stale prices during our sample period.
Interestingly, there are large differences across the different dark pools, with the highest (lowest) instance of stale pricing being 50% (21%) based on trade count and 33% (8%) based on euro turnover (Chart 5).
Chart 5: Frequency of stale pricing
We also compute the latency of stale executions across the different dark pools. Latency here is measured as the difference between the trade time stamp in the dark pool and the time stamp of the true PBBO midpoint at the time of the dark trade. We observe median latency across dark pools ranges from around 9ms to 15ms. However, because larger dark pools have lower latencies, the market-wide median latency is closer to the low end, at 9ms. This maps closely with the observed fiber transmission speeds between Stockholm and London, indicating dark pools use fiber for price updates.
Costs of stale Nordic pricing could be over €3 million per year
We estimate the cost of stale pricing as the difference between the actual PBBO midpoint and the price in the dark pool for all stale transactions. The cost per dark pool is driven by each pool’s overall liquidity and its proportion of stale trades (see Chart 6).
We calculate that in 2023 a total of €3.3 million is lost for just for the 80 Nasdaq Nordic listings in the period we analyze.
Chart 6: Euro cost of stale executions
In relative terms, this cost adds up to 2.9 basis points (bps) across all dark pools. To put this in context, the average quoted spread on Nasdaq during our sample was 5.6bps. Furthermore, this cost of stale execution ranges from 2.5bps to 3.6bps across the dark pools again showing that there are large differences across them (See Chart 7).
Chart 7: Cost of stale executions in bps
Not all dark pools are the same
All the above statistics exclude Nasdaq’s Nordic-at-Mid. That’s because Nordic-at-Mid is different.
Being integrated into the matching engine for the primary lit book, it always trades at the current PBBO midpoint, experiencing zero cases of stale pricing.
Furthermore, in the case of Nordic-at-Mid, the use of size, as opposed to time, priority helps investors trade much larger quantities than competitor dark pools. In our sample, Nasdaq’s Nordic-at-Mid has the second-largest median execution size (€6,853) across all dark pools and the largest medianexecution size across the five largest dark pools (see Chart 8).
Chart 8: Trade size distribution across dark pools active in Nasdaq Nordic listings
Importantly, this means natural investors using Nasdaq’s Nordic-at-Mid eliminate the risk of trading at stale PBBO prices and simultaneously increase the chance their midpoint fills are executed against other natural investors crossing the spread.
That’s because zero latency means no chance for faster traders to intercept midpoint liquidity at the expense of natural orders. That, in turn, improves the liquidity available, with price improvement, for spread crossing orders on the primary.
The availability of an atomic dark-lit sweep functionality allows aggressive orders to ping the Nordic-at-Mid before hitting the far touch again with no risk of interception by faster traders. In our sample, a dark fill originating from such sweep orders, on average, results in 2.3bps instantaneous half-spread savings plus a further 3.8bps savings in price impact.
Nordic-at-Mid liquidity is growing
That makes Nordic at mid better for all investors — those looking to hide at the midpoint as well as those needing to cross the spread for liquidity. Not surprisingly, Nasdaq’s Nordic-at-Mid market share has also been increasing. Rising from 6.6% of all dark midpoints in October 2022 to 24.0% in April 2024 (Chart 9).
Chart 9: Dark RFPT market share
This again proves the consolidated tape can’t be pre-trade
In a future with a European consolidated tape, it may be tempting to use the EBBO as a benchmark to match trades in real-time. However, pegging to a consolidated tape will almost certainly make the stale pricing problem even worse than we see above.
That’s because a consolidated tape will increase delays in transmitting the “latest” quotes around the market. Not only will the tape need to wait for the last venue to update, but the physical location of the consolidated tape provider will also add another leg of transmission time to anyone “pegging” to the EBBO prices.
The BIS study seems to prove that it will create winners and losers, both across individual national markets and by trading sophistication. In short, the distance to the center of price discovery will still matter more than the distance to the consolidated tape; it’s just physics.
Pegging isn’t price setting
The other important thing to note here is that while our focus has been looking at stale pricing in dark pools, the broader argument likely also applies to other forms of pegged trading, including in some systematic internalizers who also do not contribute to price discovery and rely on prices derived from lit markets.
If it’s important to share the EBBO with all traders, it’s also important that the venues pegging to EBBO pay their fair share. Said another way: market makers setting the spread deserve to capture that spread, too.
Failure to price the EBBO correctly will result in artificial fragmentation like the U.S. has, where pegged venues can free ride on the quotes of price setters, earning trade revenues while reducing spread capture for the very traders who aresetting those prices.
And that won’t just increase latency costs; it could easily add to search costs and harm price discovery at the same time.
The Bank for International Settlements (BIS) and the Bank of Canada have launched the Toronto Innovation Centre, the first such centre to be established in the Americas and the seventh to be opened by the BIS in collaboration with partner central banks around the world.
Tiff Macklem
“Fostering innovation has never been more crucial; that’s as true for central bankers as it is for business leaders. As the financial sector continues to evolve, we need to innovate in different areas and apply skills that aren’t traditionally associated with central banking. By doing so, Canadians can share in the benefits of innovation. That’s why this hub and our partnership with the BIS are so important,” said Tiff Macklem, Governor of the Bank of Canada.
The centre will explore the development of new technologies to make the financial system more efficient and inclusive, both in Canada and throughout Latin America and the Caribbean.
The opening of the Toronto Innovation Centre is a very proud moment for the BIS. It represents an important milestone in our efforts to build the financial system of the future through innovation and experimentation, enabling us to fully bring this mission to the Americas together with our many partners in the region. We are looking forward to collaborate with the Bank of Canada and other central banks to foster a more modern, efficient and inclusive financial system. – Agustín Carstens, General Manager of the BIS
Senior officials from central banks, regulatory agencies, financial institutions and fintechs attended the launch ceremony in Toronto.
The Toronto Innovation Centre will be headed by Miguel Diaz and will initially focus on projects to explore next-generation financial market infrastructures, innovation for regulatory, supervisory and oversight purposes (suptech) and open finance. These are three of the BIS’s six priority themes for its Innovation Hub. Others are cyber security, green finance and central bank digital currencies, and are the focus of other Hub centres.
BLOX Markets, emerging gradually from stealth mode, is in the process of developing a new retail focused equities ATS, Traders Magazine can reveal.
Khody Azmoon
“At BLOX Markets, our mission is to open up access to off-exchange equity retail flow through order competition. We believe retail investors would benefit from greater competition in the execution of their orders and other investors would benefit from opportunities to execute against such orders, so we’re building a trading venue bridging the gap between retail and institutional investors”, Khody Azmoon, Head of Business Development & Product Strategy at BLOX Markets, said.
BLOX Markets foresees a big opportunity here. Azmoon previously expressed that the Tick Size & Access Fee proposal will likely be “the next retail equity market structure rule to be adopted”.
This anticipation is based on the comments provided by the SEC during the recent Bloomberg Equities Market Structure conference, and BLOX Markets anticipates adoption as early as Q2 based on feedback from the street.
He further indicated: “While we anticipate the Tick Size & Access Fee proposal will be adopted soon, these impending adjustments could create pressure on the Payment for Order Flow (PFOF) dynamics between wholesale market makers and retail brokers, fostering more competition for retail order flow.”
He mentioned that the last instance they witnessed such substantial equity market structure changes by the SEC was about two decades ago.
They perceive an uncommon chance emerging wherein companies that not only exhibit forward-thinking but also proactively construct their business models in anticipation of these market shifts can emerge as the next generation of leading firms in the marketplace.
“With that being said, we don’t see wholesale market makers as direct competitors,” Azmoon said.
“We operate in a very highly competitive industry where collaboration and competition often go hand in hand. It’s not uncommon for businesses to engage with various players in the market, including potential customers who are competitors too,” he said.
“Navigating these dynamics requires a strategic approach to ensure that our business interests align with all of our partnerships. In fact, we’re in discussion with several wholesale market makers to become potential investors,” he added.
According to Azmoon, there are several advantages: “We are building a trading venue facilitating access to off-exchange equity retail flow through open order competition between retail brokers and other market participants with the goal of resulting in better execution quality and increased natural liquidity crosses with lower market impact.”
He also expressed their strong commitment to fair access and transparency as a new trading venue.
As a result, in order to differentiate themselves from other recent ATSs, they do not plan to operate any hosted or private order books.
“Some of the other advantages of launching a trading venue today enables us to build using a more modern technology stack, achieving better latency and resiliency from an infrastructure standpoint,” he said.
Azmoon outlined the product roadmap, indicating plans to launch two order books in 2025, with a potential third order book slated for 2026, and additional expansion targets to hopefully follow.
He highlighted that BLOX Markets has garnered significant interest from several retail brokers and other market participants including the buy-side, sell-side and wholesale market makers.
”More importantly, we’ve designed a trading venue to successfully operate in today’s markets as is and have game plans to adjust for tomorrow’s changes as we need to pivot,” he concluded.
Diagonal chain made of zeros and ones. Cryptocurrency and mining. A bitcoin metaphor. Gray background. A close up. 3d rendering mock up
FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
Many musicians have generated income from selling rights to their music since the innovation of “Bowie bonds” in the 1990s. The advent of tokenization, the process of representing physical assets as digital tokens on a blockchain, has led to another innovation.
A 1708 Stradivarius violin which has been owned by European royalty, including Catherine the Great, Empress of Russia, which is valued at approximately $9m, has been tokenized.
Bowie negotiated with record label EMI to sell bonds based on royalties for 25 albums released between 1969 and 1990, including such classics as Ziggy Stardust and Heroes. In 1997 he sold “Bowie bonds,” which were backed by these royalties and allowed investors to earn a fixed annual coupon of 7.9%.
Fast forward to June this year and Galaxy Digital Holding said in a statement that it had tokenized “Empress Caterina.” The US digital asset and blockchain company said tokenization of this iconic musical instrument, celebrated for its unmatched craftsmanship and storied provenance, marks a significant advancement in the application of blockchain technology to unlock the value of unique real-world assets.
The Stradivarius violin is owned by Yat Siu, co-founder and executive chairman of Animoca Brands. He acquired the instrument in 2023 and is using the tokens as collateral for financing facilitated by Galaxy’s Global Markets business. The tokens provide a pathway for owners to realize the economic value of their holdings without selling the asset itself.
Yat Siu, Animoca Brands
Siu said in a statement: “As a technologist with a background in classical music, this is a very special moment for me. I am thrilled to help trailblaze this new economic model for unique assets while at the same time preserving and sharing not just a very rare and precious instrument, but also a piece of history.”
Galaxy tokenized the violin through GK8, the firm’s enterprise-grade blockchain custody and monetization platform which has a proprietary Tokenization Wizard tool. The Stradivarius non-fungible token (NFT) is on the Ethereum blockchain and publicly recorded on OpenSea, and so could potentially be traded. However, this NFT is exclusively for the financing transaction between Sui and Galaxy, and will not be available to investors in any secondary market or public offering.
A violin is an unusual asset to tokenize, but the procedure is becoming more mainstream. Even The WFE, the global association for exchanges and clearing house, recently published a paper, Demystifying Tokenization: Embracing the Future. The WFE said tokenized traditional assets should be viewed as nothing more than a modernized and innovative iteration of traditional finance, providing new opportunities for investors and market participants.
The benefits of tokenization include fractional ownership, enhanced liquidity and greater financial inclusion. However, the paper also warned that some of the supposed benefits are overexaggerated or don’t exist at all.
“Continuous 24/7 trading – if truly needed – can be achieved without tokenization,” said the WFE. “Disintermediated models face conflicts of interest and instantaneous settlement in tokenized trading may have unpredictable timing, affecting market liquidity and trading costs, especially if assets and funding need to be blocked prior to execution.”
In addition, distributed ledger technology is currently not fast enough to execute and settle all the trades running through a highly active exchange, different blockchains are currently not interoperable and there is a lack of regulatory certainty.
James Auliffe, WFE
James Auliffe, manager, regulatory affairs at the WFE, said in a statement: “The fundamentals of tokenization and the infrastructures these assets trade on need to be better understood. Regulation in this area should reflect that tokenisation is a natural evolution in the financial industry, rather than a drastic break from the norm. Its usage is suitable in particular environments and for particular assets, but in these cases, market participants can reap great benefits.”
Ripple, the enterprise blockchain and crypto company, and Archax, the UK’s first Financial Conduct Authority regulated digital asset exchange, broker and custodian, believe in the benefits of tokenization. They are extending their existing collaboration to bring “hundreds of millions of dollars” of tokenized real world assets onto the XRP Ledger over the coming year.
Graham Rodford, chief executive of Archax, said in a statement: “We have hit the tipping point for mainstream adoption of digital assets for real world use cases.There is clear real-world utility in use cases like RWA tokenization for the operational efficiency, access to liquid markets and transparency inherent to crypto, and Archax has already tokenized assets such as equities, debt instruments and money market funds.”
Traders Magazine spoke with John Murphy, Global Head of Futures at Mizuho Americas, who won Best in Clearing at the 2024 Markets Choice Awards.
John Murphy
What is your reaction to winning at the 2024 Markets Choice Awards?
It was unexpected and very appreciated. The competition for clearing is fierce and we go up against top names every day. We leverage technology and talent to consistently get the best execution we can for clients. It was a very proud moment to have our efforts recognized and to know we are making a difference in the industry.
Please tell us about Mizuho Americas Futures Clearing and your capabilities.
Mizuho provides execution and clearing services across a broad spectrum of institutional clients including financial institutions, commercial hedgers, commodity trading advisors, hedge funds, money managers, and pension funds. Our Sales Team is dedicated to working with clients to create bespoke, customizable solutions to match clients’ specific needs. By offering comprehensive coverage provided 24/6 on all aspects of operations and execution while running out of one central location with no outsourcing, Mizuho creates a seamless avenue for client communication and operational efficiencies. Our approach and managing our business at this high level of service, have pushed us to grow to one of the top FCMs in the marketplace.
What are the factors driving the growth of the futures market?
The introduction of new products to meet global demands, combined with the ever-changing regulatory landscape, have provided a need within the marketplace for sustainable Futures clearing providers. We’re happy to say that, here at Mizuho Americas, we’ve continued to invest additional resources to ensure we’re able to support our clients as their needs – and the needs of the industry – continue to grow and progress.
What can we expect from Mizuho Americas Futures Clearing in the near future?
As the industry continues to evolve, so will we. By launching initiatives to support new products, services, and platform improvements, we are constantly looking for ways to continue to strengthen our partnerships with clients and ensure they continue to receive the premier service they can expect from Mizuho Americas Futures.
Despite a decrease of 15% year-over-year (YoY), WhatsApp bans prevail as the most-commonly used solution (43%) to marshal internal business communications, according to a new report from Global Relay.
Alex Viall
“Asset managers, broker-dealers, and investment banks are all grappling with the WhatsApp conundrum,” said Alex Viall, Chief Strategy Officer for Global Relay.
The second annual Industry Insights Report: Compliant Communication 2024 also revealed that four out of five firms (79%) are increasingly using communication surveillance technology to identify misconduct and culture risk.
The global survey examines how compliance, surveillance, and risk leaders in financial services are responding to intensified regulatory scrutiny surrounding recordkeeping and compliant communications, charting attitudes to WhatsApp, social media risks, monitoring and surveillance, sentiment around AI, and what the future might hold for compliance.
Despite many firms noting that they ban the use of WhatsApp at work to mitigate the risk of non-compliant off-channel communications, only 50% of respondents said they thought that channel bans would withstand regulatory scrutiny.
Since the publication of last year’s global Industry Insights Report, U.S. regulators have continued to issue significant fines to firms that “did not maintain or preserve the substantial majority of these off-channel communications,” with three tranches of enforcements totalling nearly $450 million, most recently in February with the SEC’s $81 million in penalties against 16 firms.
Global Relay’s report also revealed that more firms – up 4% YoY – around the globe are facing difficulty getting staff to comply with rules around electronic communication channels, with nearly two-thirds (65%) citing this issue as part of their ongoing challenge around off-channel communications risk.
Financial services firms are making progress toward monitoring business communications with significantly fewer respondents having difficulty monitoring all communication channels, down to 24% from 54% last year.
“Financial institutions are reacting in response to the substantial regulatory penalties,” commented Viall.
“They have got the message and are implementing strategic compliant solutions that ensure the capture, storage, and monitoring of all essential business communication channels. This is no easy task,” he said.
Viall further said that compliance and risk officers are more aware that banning social media channels and forbidding the use of personal mobile devices are impractical measures that are difficult to enforce.
“Many are still in the planning phase but all are tackling this and prepared to show stakeholders and regulators how they best plan to manage off-channel communications,” he said.
Contrary to industry perception, the report revealed the number of financial institutions using Bring Your Own Device (BYOD) policies has ballooned from 36% in 2023 to 53% in 2024.
Considering continued enforcement for personal device usage, 45% of respondents have looked to clarify their BYOD policies, with 17% moving away from BYOD altogether.
Respondents reported general uncertainty about AI in financial compliance, including whether it is a risk (17%), reward (10%) or both (32%).
Despite this caution, 42% of global respondents said they would be looking to introduce AI to compliance workflows in the next 12 months, with 57% saying that they would not be.
Leaders at North America firms demonstrated reticence compared to their European and Global counterparts, with 65% of North American firms noting they do not have plans to introduce AI within the next year.
NEW YORK, June 13, 2024 /PRNewswire/ — Further building on its GenAI leadership in the fixed income market, LTX, an AI-powered corporate bond trading platform backed by global Fintech leader Broadridge Financial Solutions Inc. (NYSE:BR), today announced GenAI-powered List Trading functionality. The new feature allows users to leverage GPT technology to generate and execute multi-asset class, multi-directional trade lists seamlessly via RFQ+.
Jim Kwiatkowski
“In response to clients’ positive engagement with our GenAI-powered app BondGPT and their request for similarly innovative trading capabilities, we developed GenAI-powered List Trading,” said Jim Kwiatkowski, CEO of LTX.
“This new functionality builds on LTX’s foundation leveraging powerful AI and advanced trading protocols like RFQ+ and RFX to improve efficiency, increase time savings and offer greater flexibility in trading strategies.”
This new capability addresses the ongoing need to streamline workflows, as clients consistently seek to integrate GenAI into their pre-trade and trade execution processes.
The introduction of this functionality coincides with the one-year anniversary of LTX’s GenAI application, BondGPT. Within the LTX platform, traders can use BondGPT to generate lists of bonds based on their specific criteria easily and quickly, then seamlessly construct and execute their list of trades. Traders can define rules for auto-execution, allowing greater workflow efficiency. BondGPT+ users can further enhance their portfolio management processes by using GenAI on their inventory and positions to inform portfolio construction decisions.
To date, more than more than 90 leading asset managers and more than 35 dealers have joined the LTX platform, representing a significant liquidity pool. LTX has attracted many of the world’s leading asset managers and dealers, with over $39 billion in the Liquidity Cloud in May 2024.
Interactive Brokers, an automated global electronic broker, has announced the addition of European stock options and European index futures and options through Cboe Europe Derivatives (CEDX).
Milan Galik
Milan Galik, Chief Executive Officer of Interactive Brokers, said: “The introduction of Cboe Europe Derivatives underscores our commitment to providing clients with an extensive range of products to enhance their trading strategies at low cost. As investors increasingly use derivatives to diversify and fine-tune market exposure, CEDX broadens the investment options available for our clients.”
This addition allows Interactive Brokers’ clients another means to trade European equity derivatives alongside a broad range of global financial instruments, including stocks, options, futures, currencies, bonds, funds and more, from a single unified platform.
Adding access to CEDX complements Interactive Brokers’ existing European equity derivatives offering through Eurex and Euronextand gives clients an additional way to manage European investments. With CEDX, Interactive Brokers’ clients can trade over 300 stock options on leading European companies from 14 countries and European equity index derivatives.
Futures and options contracts based on Cboe Europe single country and pan-European indices are available on well-known benchmarks, including Cboe Eurozone 50, Cboe Germany 40 and Cboe UK 100. In addition, CEDX’s exchange, market data and connectivity fees are waived until the end of 2024.
Iouri Saroukhanov, Head of European Derivatives, Cboe Europe, added, “We’re thrilled that clients of Interactive Brokers can now access Cboe Europe Derivatives’ suite of pan-European equity derivatives contracts. This is a significant milestone in CEDX’s journey to improve the ability of retail investors to gain access to and benefit from European derivatives, particularly options.”
DTCC, the premier post-trade market infrastructure for the global financial services industry, has announced the launch of FICC’s interactive, public-facing Capped Contingency Liquidity Facility (CCLF) Calculator.
With the expansion of central clearing in U.S. Treasuries on the horizon and given the size of transactions in the U.S. Treasury market – now exceeding USD $7 trillion daily – CCLF is a critical risk management tool used for managing DTCC’s Fixed Income Clearing Corporation’s (FICC) liquidity risk arising from settlement activity. Market participants can input their current unique settlement activity into the calculator to estimate and understand the CCLF-related liquidity obligations that could arise from membership.
Tim Hulse
CCLF is a rules-based liquidity resource facility that would provide FICC with additional liquid financial resources to meet its cash settlement obligations in the event of a default of the largest GSD family of affiliated Netting Members. To anticipate this potential funding need, GSD Netting Members incorporate their individually determined CCLF obligation amounts into their own liquidity plans. While the CCLF obligation is a committed obligation for the Netting Members, FICC does not require pre-funding or deposits of the obligation amount. Instead, as an ongoing FICC membership requirement Netting Members provide up-front attestations regarding their ability to provide such CCLF amounts.
“By providing the public CCLF calculator, we continue to increase transparency into our financial risk management program, empowering potential members to understand their role and obligations as a FICC GSD member,” Tim Hulse, Managing Director, Financial Risk & Governance at DTCC. “CCLF provides a critical backstop to address the financial impact of volatility and stress across repo markets while safeguarding the industry and individual members.”
The new CCLF calculator, accessible on dtcc.com, requires a series of data points to be provided by users. Once entered on screen, the calculator processes the data points using the existing GSD CCLF engine logic, delivering an estimated individual CCLF obligation.
“FICC recognizes that many firms are considering membership with GSD to comply with the final SEC rule on expanded clearing of U.S. Treasury activity,” said Claire Lough, Executive Director, Financial Risk & Governance at DTCC. “This calculator will enable market participants to simulate their potential CCLF obligations to assist in understanding what is required of a GSD Netting Member.”
FICC is the leading provider of trade comparison, netting and settlement for the Government Securities marketplace. As part of its commitment to the industry, DTCC continues to assess calculators, tools and enhanced access methods to best support the expansion of U.S. Treasury clearing activity.
Can You Hide from Stale Pegged Prices?
By Phil Mackintosh, Chief Economist, and Satchit Sagade, Head of Quant Research, Economic and Statistical Research – Europe, Nasdaq
In some of our recent posts, we’ve talked about how trades move between venues at close to the speed of light. We have also highlighted that speed is different for fiber and microwave transmissions. Data also suggests that some venues tend to set prices while other venues mostly peg to those prices. In fact, the evidence suggested that primary listing venues contribute much more to price discovery than other trading-only venues, quotes matter more than trades, and dark markets contribute almost nothing to price discovery – even when they trade – as they are pegged to price-setting venues’ prices.
This is especially important in a region as big as Europe. The time it takes for price updates to travel around such a large region means pegged prices will update a (relatively) long time after the actual prices have changed. That gives trades with microwave connections an even bigger advantage.
It’s even more important to European regulators if they’re still considering using the consolidated tape as a pre-trade price to peg prices and/or to make routing decisions.
Stale pricing found to impact dark pool executions
Given all this, it should come as no surprise that a recent study looking at U.K. dark pools found “a substantial amount of stale trading [in dark pools] occurs.” This finding has been replicated extensively across Europe, with research from Euronext, SIX Swiss and Deutsche Börse finding similar results.
You might say, “So what?” After all, a different study in the U.S. found that even though price dislocations could be seen on the U.S. consolidated tape, when the researcher accounted for the time that it would take to send trades back to the venues with dislocated prices, the “latency arbitrage” opportunities were mostly gone.
Dark pools peg to primary prices
Dark pools in Europe don’t (by definition) publish prices pre-trade. They usually aim to match buy and sell orders at the midpoint of the primary best bid and offer (PBBO). This makes use of the so-called reference price waiver.
Keeping orders in dark pools without pre-trade transparency (public quotes) helps a buyer “hide” their demand, reducing price impact from signal-driven traders.
However, we also know that hidden orders have higher opportunity costs, via lower probability of execution. That’s why dark pools are more attractive to larger, patient investors.
Fast traders are (almost) always right
What’s a little different about the U.K. study, though, is the research found that arbitrageurs frequently take dark liquidity when stale prices exist. The U.K. study finds that the arbitrageurs are on the winning side of the execution between 96 and 99 percent of the time (see Chart 1).
Importantly, because the fast trader always seems to be on the “informed” side of the spread, the research concluded that these stale prices were “imposing large costs on passive dark pool participants.”
Chart 1: Participation in stale trades: Winners and losers
Tracking latency arbitrage in dark pools: An example
Let’s look at an example of how this works for a hypothetical stock listed in Stockholm and trading in Nasdaq as well as in a London-based dark pool.
1. At time = 0 milliseconds (No activity, all markets in sync)
The market is in a steady state with the PBBO midpoint of €11, which is reflected in the Nasdaq data center located in Stockholm as well as in the London venue. A natural sell order is sitting in the London dark pool.
Chart 2a: At t = 0ms (market in steady state with a price of €11)
2. At time = 1 milliseconds (price discovery in Stockholm)
Price discovery happens in Stockholm when a buyer sends an order to lift all shares on the offer (PBO). That leads to a change in the PBBO midpoint to say €12. Information about the trade as well as the new PBBO midpoint starts its journey to London both via microwave and fiber connection; however, as we know, microwave is faster, so after 1ms, that update is closer to London than the Fiber message.
Note that at this time, only traders in Stockholm know that the trade has occurred, and the PBBO midpoint has changed.
Chart 2b: At t = 1ms, only traders located in Stockholm know the market is now higher
3. At time = 9 milliseconds (Arbitrageur trades arrive in London before updated midpoints)
The information arrives in London via the faster microwave connection where an arbitrageur who, knowing prices have gone up in the primary, seeks to buy all dark liquidity at the stale old (lower) midpoint price, resulting in a loss of €1 for the natural seller.
Chart 2c: At t = 9ms, traders using microwave can sweep London dark venues, hoping to buy at the old lower midpoint
4. At time = 10 milliseconds (Back in sync)
Fiber connections tell dark pools that the new mid is €12, and the midpoint peg reference price is adjusted. Both Stockholm and London prices are back in sync.
Chart 2d: At t=10ms, London dark pool updates the PBBO midpoint after receiving the PBBO midpoint update on fiber
In less than the blink of an eye (literally), lit prices updated to €12, and then dark pool trades occurred at the old €11 midpoint.
The fast arbitrageur can generate an instantaneous profit by selling at the potentially higher new bid while buying in the dark pool at the old midpoint. Chart 3, which is from the London study, illustrates this for a U.K. stock where a buyer-initiated dark trade prints at the older midpoint (£30.235), allowing the arbitrageur to sell at the new bid (£30.25) and make an instantaneous profit (£0.15).
Chart 3: A view of prices and fills across time shows dark prints at old prices, below the new bid (taken from Fig.6 in Aquilina, Foley, O’Neill and Ruf, 2023)
We find the same seems to happen in Nordic markets
We replicated some of the analyses from the U.K. study in Nasdaq Nordic markets. Specifically, we looked at companies in the OMXS30, OMXC25 and OMXH25 indices for the period from October 2022 to April 2024.
First, we know that around 60% of all EBBO updates for Nasdaq Nordic listings originate on Nasdaq (see Chart 4). That indicates that prices are mostly set in our Stockholm data center, which is around 10ms by fiber from the majority of U.K.-based dark venues.
Chart 4: EBBO setting frequency
We compared six dark pools to Nasdaq’s Nordic-at-Mid. Together, they account for an average turnover of €4.7 billion per month and almost 100% of executions in dark pools using the reference price waiver.
We find that:
Interestingly, there are large differences across the different dark pools, with the highest (lowest) instance of stale pricing being 50% (21%) based on trade count and 33% (8%) based on euro turnover (Chart 5).
Chart 5: Frequency of stale pricing
We also compute the latency of stale executions across the different dark pools. Latency here is measured as the difference between the trade time stamp in the dark pool and the time stamp of the true PBBO midpoint at the time of the dark trade. We observe median latency across dark pools ranges from around 9ms to 15ms. However, because larger dark pools have lower latencies, the market-wide median latency is closer to the low end, at 9ms. This maps closely with the observed fiber transmission speeds between Stockholm and London, indicating dark pools use fiber for price updates.
Costs of stale Nordic pricing could be over €3 million per year
We estimate the cost of stale pricing as the difference between the actual PBBO midpoint and the price in the dark pool for all stale transactions. The cost per dark pool is driven by each pool’s overall liquidity and its proportion of stale trades (see Chart 6).
We calculate that in 2023 a total of €3.3 million is lost for just for the 80 Nasdaq Nordic listings in the period we analyze.
Chart 6: Euro cost of stale executions
In relative terms, this cost adds up to 2.9 basis points (bps) across all dark pools. To put this in context, the average quoted spread on Nasdaq during our sample was 5.6bps. Furthermore, this cost of stale execution ranges from 2.5bps to 3.6bps across the dark pools again showing that there are large differences across them (See Chart 7).
Chart 7: Cost of stale executions in bps
Not all dark pools are the same
All the above statistics exclude Nasdaq’s Nordic-at-Mid. That’s because Nordic-at-Mid is different.
Being integrated into the matching engine for the primary lit book, it always trades at the current PBBO midpoint, experiencing zero cases of stale pricing.
Furthermore, in the case of Nordic-at-Mid, the use of size, as opposed to time, priority helps investors trade much larger quantities than competitor dark pools. In our sample, Nasdaq’s Nordic-at-Mid has the second-largest median execution size (€6,853) across all dark pools and the largest median execution size across the five largest dark pools (see Chart 8).
Chart 8: Trade size distribution across dark pools active in Nasdaq Nordic listings
Importantly, this means natural investors using Nasdaq’s Nordic-at-Mid eliminate the risk of trading at stale PBBO prices and simultaneously increase the chance their midpoint fills are executed against other natural investors crossing the spread.
That’s because zero latency means no chance for faster traders to intercept midpoint liquidity at the expense of natural orders. That, in turn, improves the liquidity available, with price improvement, for spread crossing orders on the primary.
The availability of an atomic dark-lit sweep functionality allows aggressive orders to ping the Nordic-at-Mid before hitting the far touch again with no risk of interception by faster traders. In our sample, a dark fill originating from such sweep orders, on average, results in 2.3bps instantaneous half-spread savings plus a further 3.8bps savings in price impact.
Nordic-at-Mid liquidity is growing
That makes Nordic at mid better for all investors — those looking to hide at the midpoint as well as those needing to cross the spread for liquidity. Not surprisingly, Nasdaq’s Nordic-at-Mid market share has also been increasing. Rising from 6.6% of all dark midpoints in October 2022 to 24.0% in April 2024 (Chart 9).
Chart 9: Dark RFPT market share
This again proves the consolidated tape can’t be pre-trade
In a future with a European consolidated tape, it may be tempting to use the EBBO as a benchmark to match trades in real-time. However, pegging to a consolidated tape will almost certainly make the stale pricing problem even worse than we see above.
That’s because a consolidated tape will increase delays in transmitting the “latest” quotes around the market. Not only will the tape need to wait for the last venue to update, but the physical location of the consolidated tape provider will also add another leg of transmission time to anyone “pegging” to the EBBO prices.
The BIS study seems to prove that it will create winners and losers, both across individual national markets and by trading sophistication. In short, the distance to the center of price discovery will still matter more than the distance to the consolidated tape; it’s just physics.
Pegging isn’t price setting
The other important thing to note here is that while our focus has been looking at stale pricing in dark pools, the broader argument likely also applies to other forms of pegged trading, including in some systematic internalizers who also do not contribute to price discovery and rely on prices derived from lit markets.
If it’s important to share the EBBO with all traders, it’s also important that the venues pegging to EBBO pay their fair share. Said another way: market makers setting the spread deserve to capture that spread, too.
Failure to price the EBBO correctly will result in artificial fragmentation like the U.S. has, where pegged venues can free ride on the quotes of price setters, earning trade revenues while reducing spread capture for the very traders who aresetting those prices.
And that won’t just increase latency costs; it could easily add to search costs and harm price discovery at the same time.