The search for liquidity has overtaken the low latency arms race, according to the latest update from Object Trading, provider of a multi-asset direct market access trading infrastructure to buy and sell side clients.
Market participants’ survival is about more than simply managing risk and cost; it now requires reaching trading venues in unfamiliar regions and asset classes – and finding the optimal relationships between the buy-side and sell-side to access liquidity where it is growing, and create liquidity where opportunities await. This great reshuffling is already driving innovation, requiring new approaches to market access technology.
The international trading dynamic is changing, but not only in response to MiFID II, Reg AT, and other automated trading mandates. Liquidity is present, but only for those rising to the challenge in reaching or making it. Declining profitability from low-latency trading strategies depending on single equities and futures products, with deep liquidity in incumbent markets, is pushing buy-sides to access futures markets globally whilst only making incremental changes to existing strategies. New derivatives products are constantly launching, and record trading volumes are occurring at markets such as the Dubai Gold and Commodities Exchange (DGCX) and the Taiwan Futures Exchange (TAIFEX). Metals contracts competition is occurring in Hong Kong and Shanghai. The ASX 24 on the Australian Securities Exchange is retaining its long-standing position as one of the world’s largest derivatives destinations with an active bond market and powerful pension fund asset base. Additionally, new derivatives venues such as NASDAQ’s NFX and the LSE’s CURVE are arriving to challenge both incumbents and burgeoning markets in energy and interest rate derivatives contracts. Whilst some see these changes as draining liquidity from their original sources, others find opportunity to make or take liquidity in places where they have first mover advantage.
Once buy-sides succeed in reaching new destinations, they can find themselves constantly keeping up with the exchanges. The updates, upgrades, migrations, and product launches in the name of innovation are relentless. Singapore’s SGX Titan system upgrade, ASX 24’s new trading platform implementation, the platform migration at LSE’s IDEM, Japan’s JPX derivatives trading system upgrade, and further upgrades at Spain’s MEFF and the NASDAQ OMX Nordic markets all have scheduled customer conformance and readiness dates in the first half of 2016. This is just a partial list, not to mention the regular updates at the incumbent Chicago, New York, and London based markets. The impacts of these upgrades require buy-side and sell-side technology teams to aggressively monitor and maintain their market access if managed internally, with significant investment in development, testing, and quality assurance.
The search for liquidity, wherever it lies, is further complicated by and completely dependent upon a fundamental change occurring in the buy-side and sell-side relationship. The global financial crisis resulted in an extended period of low rates and a concentration of client funds, eroding profitability from the traditional FCM (Futures Commission Merchant) model. As a result, the number of FCMs has plummeted even whilst trading volumes have risen globally. The sell-sides which remain are retrenching, due to onerous costs from trading, compliance, and capital requirements, and reconfiguring by increasing their account thresholds for accepting client business. The number of FCM players at the table have not only been reduced but their roles have also been reshuffled. There are fewer bank FCMs providing a single resource for a full range of client services; non-bank FCMs partly meet the demand for specialist regional and asset class services. With gaps still remaining in market coverage, the buy-side must now start to find a route to market by searching for new FCM partners that want their business and can provide services they need.
In 2016, the buy-side and the sell-side will continue to find creative solutions to benefit from the global rise of futures volumes, either directly or through innovative third parties. With the sell-side retrenching, the buy-side will be forced to take on more responsibility, choosing to provide their own market access, and possibly risk and compliance solutions, independent of their prime service relationships but with the flexibility to choose specialist FCMs that serve their account size, leverage requirements, geographical, and asset class needs. This means greater scalability and flexibility to access a wider range of exchanges and traded contracts.
Available as a managed platform for all forms of electronic trading, Object Trading’s Direct Market Access (DMA) Service Platform reaches over 60 markets world-wide. With the growing number of FCMs already certified on the Object Trading platform, and complete flexibility to both customer and clearer, the buy-side enjoys greater control, and faster on-boarding to broker services; whilst the sell-side can offer high performance access with simplified compliance and no up-front technical investment. Object Trading delivers scalability across equity, derivative and FX exchanges via a single, normalized market interface for both market data and order routing.
