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Best Ex 2.0

  • By mark northwood
  • 05 Sep, 2016

MiFID2 means Best Ex2, are you ready?

For Heads of Trading at Asset managers, and their legal and compliance teams, MiFID2 means preparing for yet more transparency.

One work stream will likely be updating execution policies to add both more asset classes, and more colour, so that clients have a clear picture of the sufficient steps being taken to achieve “best execution” of their orders. It really is BestEx2.

Policies will need to cover the basic conflicts of order handling (merging, allocating and crossing) and describe the different steps taken when trading, for example, large or small orders in either liquid or less liquid securities. Your clients should be able to follow why each execution path is chosen based on the factors and weightings assigned to them.

So let’s assume you’ve consulted your experienced traders to build a nice decision tree, which is supported by the output from your TCA and other analytics. This is a competitive business, so what do you do next to take your firm to the next level with an execution process, outlined in policy, that stands out because it really is best?

The short answer is to question everything you think you know, and open your mind to the possibility that a better path or approach may exist, but demand evidence.

To start the journey, Bips suggests 5 questions a buy side head of trading should ask next:
  1) How do I ensure that traders and systems consistently comply with our execution policy?
  2) Can my TCA tell me where my process needs attention and measure the impact of any changes we make?
  3) What should I automate, or semi-automate?
  4) How does each broker generate IOIs from our flow, and do the funds benefit?
  5) Can I show that my commission rates reflect the expected value to the funds?

Please contact me at Bips Global if you are interested in answering these questions, or any of the countless others!

Bipsblog

By mark northwood 15 Mar, 2017
On March 3rd the UK's Financial Conduct Authority (FCA) published updates from its supervisory work in two key areas: how investment managers deliver best execution for their clients, and how they manage the use of dealing commissions.
Links here:
https://www.fca.org.uk/news/news-stories/investment-managers-still-failing-ensure-effective-oversigh...https://www.fca.org.uk/news/news-stories/firms-continue-fail-meet-our-expectations-use-dealing-commi...

The message is clear: The FCA believes that the buy side is still not doing enough to protect the interests of their clients in two areas where they have a clear fiduciary responsibility. The industry is very focused on the minute details of trading venues and the interactions between sell side and buy side, but is missing the point that the FCA wants better outcomes for the " my side ", the individuals (probably including you), who collectively own the assets being managed by the buy side, in pension funds and other pooled investment products.

This is an important distinction, because it clearly defines 2 tests for each decision made by an investment firm's management team, and all of its employees:
1) Does this improve the outcome for our clients?
2) Does this risk doing harm to the interests of our clients?

Importantly then, business initiatives and projects that improve operational efficiency (and profitability) of the investment firm must pass these tests by, for example, passing on cost savings to clients thorough either lower charges, or producing demonstrably better investment performance. 

These tests should also be considered in the context of the consolidation currently taking place among asset management firms. 

Bips Global is experienced in advising on how to meet the expectations of "my side" clients and regulators, so please call us.
By mark northwood 28 Nov, 2016
2017 is nearly upon us. 2016 has been a year of upsets and distractions, so there were plenty of excuses for putting off the additional work required to prepare your organisation for all the changes arriving in 13 months time.

The largest firms have had MiFID projects underway for some time now, usually with streams dedicated to particular functional areas which are covered by specific articles and technical standards within the level 2 text, and level 3 guidelines where they are available. But for many firms the primary focus of the management team is rightly fixed on running their business, and the risks are growing every day that there will be insufficient time to implement changes.

The longest lead times are normally associated with projects involving adding new vendor solutions to legacy technology, or developing new code within existing systems. Big firms have big technology stacks and lengthy development, testing, QA and user acceptance procedures for vendor products or code changes, which stretch out the timetable. Smaller firms with simpler, platforms may be a little more nimble, as long as they accept some compromises on the functionality they will get through solutions offered by their enterprise providers, for example. The principal areas of concern here are the greater recording and reporting burdens on investment firms across all asset classes.

Changes to business structures, where particular entities which house a regulated activity are not registered in the correct country for example, also incur a big time penalty and should be underway. Firms with their investment teams spread across more than one country need to examine the internal relationships carefully.

Updating processes, practices and the associated policies can be done more quickly, as long as there is sufficient management attention, supported by clear guidance from those with detailed knowledge of the RTS and ITS requirements. A good example is the investment firm's execution policy, which must be easily understood by the firm's clients, but be specific for each of the 20 or so different classes of financial instrument which they may trade.

Consultancy firms like Bips, and others that we are collaborating with to add complimentary skills, offer investment firms the deep knowledge required to get your MiFID2 preparations moving quickly. We, and our partners only employ experienced market practitioners, so you will not waste expensive time training us up about what you do. All that is required is a quick introduction to your organisation and its processes and systems and the work begins. The added advantage is that you get a fresh, independent perspective from people who have managed similar businesses.

Contact us to learn more about how we can help.
thanks
Mark


By mark northwood 05 Sep, 2016
For Heads of Trading at Asset managers, and their legal and compliance teams, MiFID2 means preparing for yet more transparency.

One work stream will likely be updating execution policies to add both more asset classes, and more colour, so that clients have a clear picture of the sufficient steps being taken to achieve “best execution” of their orders. It really is BestEx2.

Policies will need to cover the basic conflicts of order handling (merging, allocating and crossing) and describe the different steps taken when trading, for example, large or small orders in either liquid or less liquid securities. Your clients should be able to follow why each execution path is chosen based on the factors and weightings assigned to them.

So let’s assume you’ve consulted your experienced traders to build a nice decision tree, which is supported by the output from your TCA and other analytics. This is a competitive business, so what do you do next to take your firm to the next level with an execution process, outlined in policy, that stands out because it really is best?

The short answer is to question everything you think you know, and open your mind to the possibility that a better path or approach may exist, but demand evidence.

To start the journey, Bips suggests 5 questions a buy side head of trading should ask next:
  1) How do I ensure that traders and systems consistently comply with our execution policy?
  2) Can my TCA tell me where my process needs attention and measure the impact of any changes we make?
  3) What should I automate, or semi-automate?
  4) How does each broker generate IOIs from our flow, and do the funds benefit?
  5) Can I show that my commission rates reflect the expected value to the funds?

Please contact me at Bips Global if you are interested in answering these questions, or any of the countless others!
By mark northwood 02 Aug, 2016
Bips Global presents some views of how the trading landscape may evolve over the next five years, and how to get ahead of this. The management teams at many firms are already stretched thin. Bips is poised, ready to provide expert guidance to firms wanting to be prepare for these disruptive trends, or just assistance in helping to ensure your business meets the demands of its clients and regulators in 2016.

To receive the full paper please contact us.


How will the trading landscape change over the next five years?
 
This is a question about the interplay between technology, regulation and innovation by market participants.
  • the job of human traders will adapt further, with less direct handling of orders and more oversight of systematic trading processes using comprehensive dashboards (I see parallels with autonomous driving).
  • market structures across asset classes will converge further into 3 broad buckets: liquid securities, illiquid securities and structured transactions such as non-vanilla derivatives.
  • more sell side services will be dis-intermediated: news curation, simple order handling and matching, parts of ECM, and possibly wholesale clearing and custody if “blockchain” advances as it is expected to do.
  • The blurring of lines between investment firms continues with more managers of assets becoming on demand liquidity providers.
  • the technology revolution will shift focus from low latency and smart algos, which will become commoditised, to data harvesting and predictive models using machine learning and other computational AI techniques on this ever expanding set of data.
  • the rise of passive investing will shift to strategies growing out of this factor based quantitative approach, further impacting the volume profiles and correlations across markets.
  • unexpected impacts from the interaction of these rapidly evolving trading strategies will continue to create conditions of unstable equilibrium, and opportunities for smart human investors, who understand the “behavioural bias” of the models which will drive so much trading. 
  • regulatory impact (capital restrictions, market transparency and Volcker restrictions on prop trading) will change role of investment banks, hampering capital commitment and rewarding firms with connectivity to a diverse client base.
  • the new transparent trade data regime will level the playing field, but require new dealing strategies using search/query engines to seek out liquidity from most likely sources. 
  • a strategy for consuming and interpreting trade data, and the myriad of new sources of information will become a competitive imperative, if not a regulatory one
  • the limit order books of equity and other liquid instruments will continue to be dominated by new players, often unfamiliar to investors, such as Jane Street, Tower, Optiver and Virtu.
By mark northwood 19 May, 2016
Bips is about finding basis points and is ready to assist investment management firms, which recognise the potential to improve their performance by applying the core elements of the “ best execution” process obligations to their whole investment process, end to end. It is my expectation that this will eventually become a regulatory imperative for investment firms, as well as being a competitive one.

The approach is to introduce a new pair of eyes backed by extensive experience and adopt engineering principles of good design, rigorous measurement and regular assessment with an effective feedback mechanism. Current reporting and oversight is heavily focused on investment outcomes, but Bips is about building a detailed understanding of the process itself, and introducing a more systematic governance model. This methodology is applicable to investment processes based on human or artificial intelligence, or ideally a combination of the two. This helps to identify genuine causation rather than random correlation.

A Best investment process includes defining your approach to decisions about portfolio composition, measuring all aspects of the implementation and then interrogating the data for lessons which will help improve the process in the future. This approach is central to professional sport and can be applied in the complex world of investment.

Each investor has a different process, and this will determine the steps required to be deemed "sufficient".

For example, the factors contributing to an investment decision (and, importantly, its timing) may include proprietary inputs such as research, risk and flows, external inputs such as sales ideas and research, and signals derived from market data or positioning information. Some of these may be more effective than others, or perhaps work better in certain combinations. Analytical techniques using data science will identify these and inform potential improvements to the process, which can be introduced systematically, in a carefully controlled change program.

Over time, the outcome will be the Best investment process solution, or Bips.

Investment performance, and in particular relative performance is measured in basis points, or "Bips"

If life (and football) are games of inches, Investment and trading are games of Bips.

Viewer discretion (Al Pacino does it best)
http://m.youtube.com/watch?v=9rFx6OFooCs
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