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2015 Market Structure Playbook

As we move into the new year, the regulatory and market structure landscape is unclear. Exchanges are evolving and the various global regulatory bodies are pursuing a wide range of independent initiatives. This targeted call will focus on near term issues and provide insight into the road forward in 2015.

Liquidity Barometer: Asia Pacific Q3 2014

In Asia’s equity markets, liquidity experienced an upward trend during thethird quarter of 2014 according to ITG’s Asia Pacific ‘Liquidity Indicator’.

The indicator had fallen for three consecutive months in the second quarter, declining from 1088 at the end of March to 1038 at the end of June. It perked
up in the third quarter, rising to 1070 in August and September.

Improved liquidity in early autumn is a feature that has taken place in previous years and 2014 emulates that trend. Although the barometer shows a horizontal line for this year, it bodes well for October and November and liquidity is unlikely to see any downward movement for the rest of 2014.

Proposed National Market System Plan to Implement a Tick Size Pilot Program (File No. 4-657)

French Regulator Issues Algo Trading Notification Requirement

A little over a week ago, the French Autorite des Marches Financiers (“AMF”) published guidance on certain notification requirements relating to the use of algorithmic strategies for trading in certain French securities. The notification requirement comes into force on 1st January, 2015.

Based on conversations we held with the AMF late last week, we understand that they consider this new rule to be a precursor to the algorithmic trading strategy notification requirements included in the overhaul of the European Union’s Markets in Financial Instruments Directive (“MiFID II”). Whilst we do not doubt the AMF’s resolve to impose an algorithmic trading strategy notification requirement on market participants as part of the MiFID II package, we query if other national regulators such as the U.K.’s Financial Conduct Authority will use their powers under MiFID II to follow a similar approach to the AMF’s.

Unbundled, Unclear, and Undefined: ITG Update on How the UK’s FCA is Changing the Global CSA Landscape

As we approach 2015, European regulators are driving a secular shift in the buy side’s payment for research framework. Rarely have non-U.S. policies and procedures generated such a high level of influence on domestic institutional commission structures. Commission Sharing Arrangements are at the center of this debate.

This brief call discusses the following:

  • The conflicting perspectives of the various European regulatory bodies on the future of payment for research
  • Order handling and potential outcomes in a post MiFID II marketplace
  • How these changes are impacting U.S. based investment managers today and into 2015
Cul de Sacs Revisited: Dark Aggregation, Lit Markets, and the Cost of Duration

Abstract
We demonstrate links between order duration, dark pool performance, and orders filled in both lit and dark venues. Five questions are addressed. Does exposure of an order to lit markets affect trading performance in dark aggregation schemes? Do market conditions affect the degree of dark order exposure to lit markets? Do market conditions affect trading performance in the case of mixed dark and lit child orders? Is there a connection between market conditions and the duration of an order? Do trading costs increase with the number of venues visited by an order? In answering these questions, we find that dark pool aggregation is beneficial. The fragmentation of liquidity enabled through dark aggregation algorithms has not reduced transaction costs relative to directly accessing a single block crossing venue, however.

Listen to the call

Brussels must see the lighter side of dark pools – or watch City innovation wither

FROM allegedly failing to execute trades at the best price, to clients being misled about the type of trade being executed, trading in dark pools has taken its fair share of criticism recently. But against this flurry of negative headlines, and with the EU seeking to enforce stricter controls on dark pools, it is important to remind ourselves why investors want to trade away from public exchanges, without prices being displayed until after execution.

The Cost of Liquidity in the FX Market

On July 3, 2013, the courts pronounced caveat emptor with respect to execution performance in the FX market. U.S. District Judge Denise Cote threw out a lawsuit, which accused JPMorgan Chase & Co. of breaching a fiduciary duty to custodial clients by charging “hidden and excessive mark-ups” on currency trades. Judge Lewis Kaplan dismissed a lawsuit directed at officials of Bank of New York Mellon, for ignoring “red flags” or knowing that trades were being processed at the worst or near-worst prices of the day.

Breaking the Habit

Ofir Gefen, Head of Electronic Brokerage at ITG Asia Pacific, looks at how opportunistically taking blocks of liquidity rather than sticking with volume-based trading habits can improve trading performance.

The Art and the Science of Leveraging Cloud Infrastructure: Making Cloud Computing Work in the Trading Environment

Having demonstrated an initial, and understandable, wariness of cloud services, trading firms and other players such as hosting providers in the institutional trading environment are slowly coming to embrace the technology. With storage demands for mid-size firms growing at approximately 90 terabytes a year, perhaps this is not surprising. Building proprietary infrastructure that can keep up with this level of growth is comparable to painting the Golden Gate Bridge: a never-ending task.

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