How do you use AI, and has it made an appreciable impact on your business yet? Global Trading is sizing the market and gauging the sentiment for artificial intelligence usage at the coalface of trading – have your say here.
Whether it’s GenAI or machine learning, large language models or predictive pattern recognition, AI is the buzzword of the year. Permeating almost every panel at TradeTech in Paris last week, AI has edged its way into mainstream consciousness – but has it edged its way onto your desktop yet?
Launched on Buy-side Innovation Day at TradeTech, this new survey from Global Trading aims to size and sort the usage of AI across the industry – from sell-side to buy-side, traders to vendors. How are you using AI, and what for? Is it making your job easier, or taking jobs away? Is it going to change the world, or is it the emperor’s new clothes?
Whatever your views, AI is a key issue to consider, and a key competitive element to keep up with. Please spare a few moments of your time to complete this quick survey, and tell us how AI is being used in your organisation.
Results will be published in Global Trading’s Summer (Q2) edition.
Emerging technologies and improving the experience for market participants were spotlighted in “The Options Trailblazers Pushing the Boundaries of Innovation” panel Thursday morning at the Options Industry Conference in Asheville, North Carolina.
To be sure, innovation carries risk, and panel moderator Lule Demmissie, Chief Executive Officer US at eToro, brought up risk management early in the discussion.
Geralyn Endo, Relationship Manager, Options Lead at MEMX, cited a 2020 Jane Street whitepaper entitled “Dead Man’s Switch: Making Options Markets Safer With Active Quote Protection.” Adopting the principles of the whitepaper has made for more liquid markets with tighter spreads and higher confidence in exchange trading, Endo said.
Kevin Luthringshausen, Senior Vice President, Chief Content Officer, at Tradier, said his firm deploys automated systems that flag illiquid or expiring options, enabling retail traders to take action, and additional risk control measures are offered.
To the question of where innovation is taking place, Luthringshausen noted a focus on trade idea generation for retail customers, delivered quickly and easily. “Our sophisticated retail audience has other jobs, they don’t do this for a living, so we focus on automation,” he said.
Laura Morrison, ETF/Investment Industry Advisor and Former Chief Revenue Officer at Direxion, cited buffered ETFs as an innovative product that can reduce the complexity of trading.
The panelists noted that innovation doesn’t need to be large and transformative; rather, it can take the firm of small, incremental improvements.
Artificial intelligence and “supercomputing” were discussed. The panel indicated that while the potential of such technologies is massive, it’s still more of a tomorrow story.
Luthringshausen said AI may prove useful in trade idea generation, and there is some application of AI to chart patterns to discern the next move of a stock or ETF. Morrison cited Daizy, which uses generative AI to produce financial reports.
Demmissie closed the panel by citing data from eToro’s surveys of its own customer base, which skews young. When asked to rank how they find and trust information, she said community was most trusted, followed by technology, followed by institutions.
“Every industry is going to be thoroughly disrupted by technology, and disruption creates innovation,” she said.
Institutions have arrived in crypto trading but it will take time to develop a diverse array of market participants and execution protocols.
Duncan Trenholme, global co-head of digital assets at TP ICAP, said at a media briefing: “The wholesale market in crypto is just starting. Institutions are here and offsetting risk in larger size.”
Manuel Nordeste, Fideiity Digital Assets
TP ICAP hosted a roundtable to discuss digital assets in London on 1 May 2024. Fusion Digital Assets, TP ICAP’s institutional regulated venue for spot crypto assets, competed its first trade in 2023, The venue follows the institutional model in traditional finance (TradFi) with independent and segregated custody, initially provided by Fidelity Digital Assets.
Manuel Nordeste, vice president at Fidelity Digital Assets, said at the roundtable that the asset manager operates 24/7 in crypto markets, which can be challenging for TradFi.
“You need to be able to provide client service on demand,” Nordeste added. “Crypto liquidity is lower at weekends and overnight, but high volatility events can happen during these times.”
Nordeste continued that Fidelity Digital Assets can facilitate multiple settlements during a day, which helps overcome the lack of access to capital in crypto markets by allowing credit line to be recycled.
Thomas Restout, B2C2
Thomas Restout, group chief executive at B2C2, said the institutional digital asset liquidity provider can settle at T+5 minutes, or 5 minutes after a trade. He highlighted that the US cutting settlement from two days after a trade, T+2, to T+1 in traditional securities markets has done the heavy lifting in terms of showing the need for accelerated times.
“There is a clash between crypto that settles continuously and current TradFi systems and that is an enormous lift,” Restout added.
Restout also highlighted the lack of standardized access to crypto venues and that time that will be needed to create the equivalent of the NBBO, the National Best Bid and Offer, in equities which is used as a reference for best execution.
In addition, Restout noted that in crypto there are more exchanges than market makers and liquidity providers. In contrast in foreign exchange, which is nearly a 24-hour market, there are only four or five major exchanges.
Duncan Trenholme, TP ICAP
Trenholme said: “ Fusion Digital Assets aims to become a major exchange for the wholesale market but this will take several years to build. The number of TradFi clients in crypto needs to grow, and there need to be more variety of market participants and execution protocols.”
There are still questions over whether the crypto market will develop clearinghouses and prime brokers, as in tradfi. In February this year FalconX, the institutional digital asset prime broker and the first CFTC registered swap dealer, announced a strategic partnership with Fusion Digital Assets. Austin Reid, global head of revenue and business at FalconX, said in a statement that the collaboration is another significant step in efforts to bridge traditional financial markets and the growing crypto asset ecosystem.
However, the development of institutions such as clearing houses in crypto will increase settlement costs.
“Digital asset settlement needs to be cheaper than TradFi and capital needs to move more quickly, then other asset classes will migrate,” said Trenholme.
Investment managers are prioritizing the quality and accuracy of their products to enhance the investor experience and grow their distribution in the next two years, according to a survey of 300 global asset management firms sponsored by Northern Trust.
The Northern Trust white paper The Next Chapter in Driving Growth in Asset Management 2024 illustrates how asset managers are enhancing the investor experience through increased quality and accuracy, targeted distribution strategies, better data management and outsourcing.
Less than half (46%) of respondents identified controlling costs as their top strategic priority in the next two years, while 72% chose enhancing quality and accuracy, improving the investor experience (70%), and expanding product set (60%) as their top concerns.
The results marked a shift from manager priorities in Northern Trust’s prior survey in 2022, when just 45% of managers identified enhancing quality and accuracy as the top priority, behind efficiency and cost controls.
Ryan Burns
“Asset managers are focused on honing their distribution channels, and having access to high-quality, consistent data is crucial in driving those decisions,” said Ryan Burns, Head of Global Fund Services (GFS), North America.
“It’s important that managers have a deep understanding of their clients’ needs so they can find them the right product at the right time, because there is no one-size-fits-all solution.
The survey, conducted for Northern Trust by WBR Insights, highlighted that 83% of respondents plan to change their product strategy in the next two years, with a focus on meeting diverse investor needs.
“Managers who over the last few years have focused on removing cost from their operating models have recalibrated their focus toward their investors,” says Caroline Higgins, Head of Global Fund Services (GFS), APAC. “In the Australian market especially, managers are tweaking their strategies to service an aging demographic. As the demographics of investors change, they must be flexible with product offerings to meet the demand.”
While managers continue to face cost pressures, the impact of T+1 and a challenging economic environment are influencing the ways that managers approach outsourcing non-core activities. Namely, 59% of respondents are looking to outsource securities finance and a similar trend emerges when it comes to liquidity management, trading and foreign exchange.
Data management was overwhelmingly identified as the area where asset managers are considering outsourcing (83%), and almost half (42%) of respondents identified their biggest challenge with data management as ensuring that the data is easily understandable/consumable and insightful.
“Many of the challenges we’re seeing today come back to the same core issue: data,” says Clive Bellows, incoming President of Northern Trust in Europe, Middle East, Africa (EMEA). “As a result, managers are looking to leverage new technology, and the survey found that many managers are looking to enhance their data management strategies by engaging their custodians for outsourced solutions.”
The white paper The Next Chapter in Driving Growth in Asset Management 2024 can be accessedhere.
SIFMA has released the after-action report from its biennial Quantum Dawn VII cybersecurity exercise conducted in November 2023.
The exercise engaged over 1,000 participants from more than 170 public and private sector institutions around the globe, including financial firms, central banks, regulators, and law enforcement entities.
The exercise simulated a scenario with a data destruction event at a critical third-party widely used by the global financial sector to trade in the Treasury and repo markets and hosted in the cloud. As the scenario progressed, it was discovered that the cause of the outage was due to an issue with a third-party.
The goal of the exercise was to strengthen public and private sector-wide communications and information-sharing mechanisms, crisis management protocols, and decision-making, as well as legal and regulatory considerations, as exercise participants responded to and recovered from the scenario presented.
During the simulation, participants were polled on a series of questions, which provided significant insight into the industry’s capabilities for addressing major third-party disruptions.
These findings include:
– A majority of participants (75%) reported having experienced the loss of a critical third party, demonstrating that these outages are not unusual. Ninety-eight percent of firms have developed and maintain response and recovery plans for their critical third parties, and 80% of firms state their plans can account for outages lasting 24 hours or more.
– Information sharing is widespread and involves senior leadership and the board level. Participants demonstrated well-developed and diverse communication plans both internally and externally with stakeholders and industry peers.
Kenneth E. Bentsen
“A clear takeaway from the exercise is the importance of a robust partnership between the industry and government grounded in information sharing,” said SIFMA president and CEO Kenneth E. Bentsen, Jr.
“No single actor – not the government, nor any individual firm – has the resources to protect markets from cyber threats on their own, nor do cyber incidents restrict themselves to one geographic region. SIFMA and its member firms are deeply committed to regularly testing and enhancing the financial services sector’s cybersecurity resiliency and working with government partners to protect the broader economy. The lessons learned from Quantum Dawn VII will help shape these initiatives going forward.”
Along with SIFMA, global consulting firm Protiviti helped organize the simulation. Following the exercise, SIFMA and Protiviti reviewed the data member firms provided during and after the exercise and developed suggestions for firms to consider when evaluating and uplifting their incident and crisis plans and business resilience strategies. These include:
Firms should continue to consider the impact of longer-term outages of their critical third parties.
While firms plan for third-party outages, an extended failure due to ransomware attacks may pose unforeseen challenges to interim workarounds and the ability of incident response teams to recover back-up data sources. Based on the firm’s risk tolerance for re-connecting to a provider that may have experienced a cyber-attack, it could be much longer than anticipated before a third-party can meet the established reconnection criteria. Recent events show recovery from a ransomware event may be measured in days to weeks.
Firms should continue preparing to manage their business through alternative means for a time frame that is aligned to more realistic recovery time objectives, considering recent ransomware events. Firms should evaluate whether their regular risk assessments appropriately reflect the increased volume and severity of critical third-party disruptions.
Firms should continue to enhance their enterprise risk assessment process to deepen understanding of how important third parties are to the delivery of their critical operations. Third-party risk management has increasingly become a focus of resilience guidelines and regulations, such as the Federal Financial Institutions Examination Council (FFIEC)’s Operational Resiliency Guidelines in the U.S. and the Digital Operational Resilience Act (DORA) in Europe, to ensure firms understand, manage, oversee, monitor and establish risk tolerances with critical third parties.
Firms should continue to improve their response and recovery processes around the long-term loss of a critical third party.
SIFMA and Protiviti offer several questions which will need to be addressed and understood in all their ramifications. Firms should establish risk-based criteria for disconnection from and reconnection to third parties that are experiencing cyber-attacks to ensure the safety and security of their own firm. In parallel, firms need to evaluate and exercise their plans to ensure there are viable recovery options that limit damage, amidst a disruption to their services.
Firms are encouraged to seek industry coordination and collaboration during major outages.
Once a critical third party’s services are disrupted, coordination and communication plans are set in motion. Firms should proactively create and validate/evaluate these protocols prior to an incident to enable smoother coordination when an event does occur. Ideally, communication and coordination will not just be underway internally but should also be managed strategically across the industry, with customers, regulators, and the media, if necessary. It is recommended that firms be prepared with escalation protocols, necessary decision-making actions and crisis management templates that can be readily executed. Additionally, firms should incorporate measures for reassuring their market partners of their recovery process as a part of their industry coordination to help ensure the safety and soundness of the sector post-incident.
Bound, a modern currency hedging and risk management company, has implemented Integral’s SaaS eFX workflow solutions to enhance its technology infrastructure.
Bound is now utilizing Integral’s FX solutions, at a fixed subscription cost, to aggregate liquidity from multiple providers and market data sources, offering their clients access to institutional-quality pricing.
Marita Cavalcanti
Marita Cavalcanti, CFO of Bound, said: “As our business continued to grow we wanted to add more liquidity providers to ensure the best pricing and FX product capabilities for our customers. Getting started with Integral straight forward – what you would expect in a regulated environment but without the hassle. They helped us achieve exactly what we set out to do, adding more liquidity providers on our platform, bringing speed and precision to our client’s risk management activities.”
This is delivered via API, offering seamless integration with Bound’s existing systems and an enhanced user experience for end-users.
Bound has also deployed Integral’s risk management, monitoring and analytics tools, all with unmatched uptime and customer support.
Harpal Sandhu, CEO of Integral, said: “We are excited to extend our reach further, enabling firms like Bound to better serve their clients. By implementing Integral’s technology, Bound benefits from enhanced risk management capabilities, providing customers with faster services that optimize how and when they exchange currencies. This development is indicative of the growing need for firms to incorporate tier one institutional grade technology into their existing workflows, while maintaining control over their own platform.”
Investment managers have always been the holy grail for options brokers, exchanges and technology providers, as one multi-billion-dollar institution that buys and sells puts and calls can generate more volume than hundreds of retail traders.
The institutional perspective was in focus Wednesday afternoon at the Options Industry Conference in Asheville, North Carolina, in a panel entitled “Behind the Curtain: A Buy Side Conversation”.
Panel moderator Joe Lewis, Head of Corporate Hedging & FX Solutions at Jefferies, opened the discussion with a question about innovation in buy-side use cases in options.
Blake Dinger, Portfolio Manager at SpiderRock Advisors, said there isn’t really a single product to highlight, rather the trend has been about the “grinding road” of customizing family office and institutional portfolios.
Eric McArdle, Managing Director, Advisor Solutions at Simplify, cited increased demand for products that speak to behavioral preferences, for example risk aversion, loss aversion, or income generation.
Megan Morgan, Head of Market Structure at Belvedere Trading, noted that while short-dated options such as zero days to expiration (0DTEs) have generated the most buzz of late, there has been quieter growth in areas such as longer-dated and flex options.
Lewis then posed the question of how the industry can best allocate resources to support growth.
Dinger said traditional retail end-client education is important, but a better use of time and effort would go toward educating the next level up, i.e. those who speak directly with the end client.
McArdle took a different angle, saying that “educating asset managers who aren’t using options is a huge opportunity.” There remain many asset managers who have never traded an option, and even if they have been approached about adoption in the past, market advances since then can be a reason to try again. “You can go back to them and say you should be considering this.”
Morgan noted her experience in trying to get pension plans interested in options, which typically ended when their Board, often composed of retired teachers, wouldn’t approve.
That outcome can be different now. “There is more of a base of education around options, and you can better explain structures,” she said.
Panelists noted the explosive growth in ODTEs, though they were skeptical about its capacity to sustain future expansion.
“For all the talk, we don’t have many clients coming to us for this…It seems to be siloed off” as its own part of the market, Dinger said.
“In product development and delivery, we don’t see much demand for that type of exposure,” McArdle said, noting there are valid concerns about 0DTEs causing a blowup that would make the headlines.
Morgan said “there are other opportunities that could drive innovation in a more balanced way.”
To the question of where the industry will be in five years, Dinger highlighted the opportunity for more outreach and education initiatives, while McArdle stressed the importance of distribution. “If we want more innovation and a more dynamic ecosystem, we have to think of it as growing the pie together, and this starts on the distribution side,” he said. “It’s about storytelling.”
Lewis closed the panel by highlighting the importance of the options industry leveraging education and quality innovation to connect with the coveted constituency of people with between $1 million and $5 million of assets, and rarely if ever use options. “Everyone is putting time into this group,” he said.
The demographic of options market participants has changed – the group is younger and more educated versus years ago, and wants and needs are evolving.
How the industry can address this by meet buyers and sellers “where they are” was discussed Wednesday morning at the Options Industry Conference in Asheville, North Carolina.
JJ Kinahan, Chief Executive Officer at IG North America, opened the panel, entitled “Engaging Today’s Investor: Are We Evolving With Them?”, by asking what has been the biggest contributor to the retail trading boom over the past several years.
“The biggest contribution is access,” said Steve Quirk, Chief Brokerage Officer at Robinhood Markets, noting that more younger people and non-professional traders can access markets quickly and affordably, in a way that historically has been the purview of older, wealthier people.
Quirk said expanded market access has helped boost the percentage of US households with exposure to the stock market to 58%, a number that other nations would love to match given the wealth creation capacity.
Jessica Inskip, Director of Education and Product at OptionsPlay, noted that democratization of financial literacy has been a powerful trend, especially as people realized they needed more than just robo-advisers to map out their financial futures.
Johnathan Hampton, Director of New Sales and Partnerships at Exegy, stressed the importance of providing infrastructure resilience and high-quality data to market participant firms who support end-user retail investors.
Panelists noted that regulation is a challenge, as there can be a disconnect between today’s options trader, who may utilize TikTok or other non-conventional sources of information, and regulators, who can be slow to adapt to a shifting landscape.
Quirk said this disconnect means the industry’s education efforts need to extend beyond customers, to elected officials and regulators, so that progress in expanding market access isn’t rolled back. “Some regulations will shut out younger investors,” he said. “Every product isn’t suitable for everyone, but don’t turn it back into an old boys’ club.”
To the question about new products that have moved the needle, Hampton said deploying cloud for market data applications has helped customers innovate, while Inskip cited integrating education with products in a way that relates to the customer.
Quirk noted durations are shorter for most things these days, and this should be reflected in financial products. ”Older people think kids are just lazy gamblers on their parents’ couches, but we say let them invest the way they want…Catering to the way they’d like to invest is important.”
What are clients asking about most often? Hampton said people want “consistent, quality data as fast as possible,” while Inskip said the primary ask is better “understanding of how markets work and how that can translate into actionable strategies.”
Average daily volume in US options was 44 million in 2023, up from 41 million in 2022 and more than double 2019 levels, according to OCC data.
The industry has had a remarkable multi-year run, driven by retail adoption, improved brokerage platforms, and strong equity markets. The question now is, how can growth continue?
That was the topic discussed on the Volume Forecast: Is 10 Billion Your Bid or Offer? panel Wednesday morning at the Options Industry Conference in Asheville, North Carolina.
Steve Crutchfield, Head of Business Development at Chicago Trading Company and panel moderator, set the stage by noting the “incredible” recent run in the options industry, starting with a surge in trading interest during the pandemic and sustained growth since then. But he recalled the industry flatlining in the 2010s after a period of expansion in the early 2000s.
“How do we grow from there?” Crutchfield asked. “What are the drivers beyond adding expiries and just hoping growth continues?”
Greg Stevens, Vice President at Fidelity Investments, said the biggest growth opportunity is in his firm’s existing customer base. “Lots of equity traders still aren’t familiar with options,” he said.
Participation in Fidelity’s option education sessions, spanning fundamental analysis, technical analysis, product explainers and more, increased 38% in 2022 and 21% in 2023, and the brokerage firm is improving its products and adding tools across mobile and desktop.
Joe Mazzola, Director, of Trading & Education at Charles Schwab & Co, agreed that education is key for options industry growth, and “none to one” is an objective. “There are many people who hold shares of stock but haven’t made their first options trade,” he said. “Education will drive adoption, and then we are meeting clients where they want to be met, with the right products.”
Chris Larkin, Managing Director and Head of Trading and Investing at E*TRADE from Morgan Stanley, noted an untapped options user base in that only about 30% of his firm’s customers are enabled for options trading, and within that group “it’s a relatively small number of clients who are actively trading options.”
Broker-provided education is helping expand the options business, as is peer-to-peer education on Reddit and other similar information-sharing sites, Larkin said.
With regard to new products, panelists noted a mixed bag. Expanded trading hours is interesting but there’s not yet much demand among options traders. Fractional options and “mini” options haven’t realized their promise, at least partly because the industry hasn’t figured out how to add the products without complicating and weighing down the interface and by extension the customer experience. “There’s always a tradeoff between innovation and complexity,” Crutchfield said.
Also discussed was the rise in the shortest-term options, often known as zero days to expiration options, or 0DTEs. Panelists said it has been a success story to date, but further expansion, including possibly into single stocks, would need to be rolled out with extra care to minimize the chance of blowups. “It’s not an irresponsible idea, but we need to cover the risks,” Larkin said.
Franklin Templeton is working with Microsoft to build an advanced financial AI platform marking a significant step toward transforming the financial services industry.
The platform will use composable business applications to help Franklin Templeton rapidly embed AI in its processes and enable digital transformation at scale.
The two firms – leaders in their respective industries – are aligning capabilities to facilitate continuous innovation within financial services.
This new financial AI platform will be built using Microsoft Azure AI services including Azure OpenAI Service (GPT-4 model), Azure AI Search, and Azure AI Document Intelligence.
Deep Srivastav
A first potential benefit will be to improve the productivity of sales and marketing teams and to create more personalized support for their clients.
“The platform will use a multi-layer intelligence approach, where individual AI capabilities can be synchronized to create an advanced level of intelligence for our business,” said Deep Srivastav, Head of AI for Franklin Templeton.
“As we went through our early work on this, we realized how cutting edge this can be and decided to build this together.”
Personalized experiences are key to delivering differentiated value to financial services clients. It is, however, challenging to merge structured data with contextual financial information, which means they are usually kept separate, with many AI initiatives thus focusing on limited capabilities such as summarization and basic conversations. Combining the two in a single, powerful capability is exactly what this collaboration aims to achieve.
“The future of how we work with clients to best meet their desired investment outcomes will require strong technological resources,” said Jenny Johnson, President and CEO of Franklin Templeton. “The newly introduced platform we are building with Microsoft marks a pivotal moment in Franklin Templeton’s journey, empowering sales and marketing teams to deliver unparalleled service while simplifying information consumption for clients. We are excited to collaborate with Microsoft to bring this innovative solution to the marketplace.”
“We’re pleased to see the successful co-innovation between Franklin Templeton and Microsoft come to life,” said Bill Borden, Corporate Vice President, Worldwide Financial Services for Microsoft. “Bringing together the financial services and technology expertise and shared vision of our teams, Franklin Templeton’s financial AI platform ushers in a new realm of capabilities for the industry, helping drive the personalization that today’s clients expect.”
Franklin Templeton has been on the leading edge of innovation across multiple areas ranging from digital assets and digital wealth to the firm’s proprietary Goals Optimization Engine (GOE) and Custom Indexing capability offered through Canvas.
