By Dan Enstedt, VP – Business Development, EMEA FlexTrade
As a significant FIX user within our EMS/OEMS solutions suite, the FIX EMEA Trading Conference made a welcomed return to an in-person event in March 2022.
FIX EMEA generated fascinating discussions on subjects ranging from ESMA’s trading tool vs venue consultation paper to interoperability and the constant need to deliver innovation. So, as the dust settles on what proved to be a great event and we begin to look forward to the other in-person events in 2022, the following are key takeaways the FlexTrade team learned from participating in two panels at FIX Trading Community EMEA.
The ESMA Consultation Paper Continues to Generate Debate
ESMA’s recent consultation paper on Trading Venue Perimeter and the intended and unintended consequences it could bring to electronification of trading and, crucially, innovation in fixed income continues to generate fierce debate.
The ESMA paper, part of broader work undertaken by The European Commission around the review of MiFID II, aims to clarify the definition of multilateral systems and the trading venue perimeter to provide guidance on when systems should be considered multilateral systems and require authorization as a trading venue.
While ESMA is still seeking consultation on the topic, the overarching feeling around the paper’s contents during the FIX panel “The Operational Model of the Future” was that scope and perimeter of the document are too broad. It means it encompasses many situations of bilateral connectivity which are not currently considered venues. In the simplest terms, under the paper’s guidance, if the buy side wishes to connect bilaterally to the sell side in an electronically readable format, they must register as a venue.
The unintended consequences
As a result, it will unintentionally capture multiple fintech solutions providers, including EMS, OMS, chat applications, and connectivity providers and has considerable potential to stifle innovation in the future. It has also raised concerns that it could cause additional confusion in all asset classes, not just in fixed income.
Focussing specifically on the paper’s impact on EMS solutions providers, FlexTrade’s Andy Mahoney detailed that the ESMA paper has created confusion among buy- and sell-side clients and the market participants with whom the firm interacts. For example, FlexTrade has received incoming calls from bulge-bracket equities brokers looking for guidance and clarification on what the paper could mean and concerns about whether an equities EMS could potentially become a regulated venue based on the paper’s suggested perimeter for fixed income.
A crucial point made during the panel was that Fixed Income EMS technology is intended to be commoditized technology that allows the buy side to connect to counterparties and source liquidity cost-effectively. Effectively, the EMS acts as a messenger carrying content created by the dealer to the client. However, the dealer is still responsible for creating the time stamp and confirming the match.
Additionally, questions arose about whether it’s possible to apply such a broad definition of what constitutes an MTF to all technology. The common consensus was that technology needed to be examined on a case-by-case basis.
The effect on innovation
Further, on innovation, fixed income is an asset class that has become increasingly complex and fragmented. It’s widely agreed to be an area that would benefit significantly from electronification, connectivity, and the aggregation of data, pricing and liquidity, which an EMS can deliver.
The ESMA paper could potentially discourage fintech firms or internal IT teams from attempting to improve the status quo or develop forward-thinking ideas due to increased costs or prohibitive requirements, which ultimately isn’t the intention of what the paper set out to achieve.
Regulation plays a pivotal role in strengthening the industry and delivering solid governance across markets and vendors. However, it can’t be done in a way that hinders innovation and potentially, impacts outcomes for the end investor.
The Return of Trading Innovation
The recent pandemic has meant that firms’ focus within the FIX Community has rightfully switched towards maintaining “business as usual” operations rather than innovation. Still, it was agreed across multiple panels during the day that innovation needs to return to the industry across all asset classes.
In particular, the final panel of the day at the conference, titled “Innovation in Technology – What do the Buy-Side Want?” offered up some interesting thoughts.
The common consensus from the session was that while it’s up to tech providers to drive innovation, it’s the responsibility of the broader buy-side community to work together as a whole to push the boundaries of what’s possible.
What does the buy side need?
The panel felt that the answer is still reasonably open when considering innovation and what the buy side needs. For instance, it’s not the case that users might even know what they need. A cited example was the use of widely adopted IT hardware such as mouse and keyboard, and appropriately, the use of Microsoft Excel within trading teams. They’ve become status quo on desktops, worked adequately, and received minor, incremental improvements. Still, the overriding feeling was that the tools trading teams use perhaps haven’t progressed at the same pace as other areas of consumer technology.
The speed at which technology can be developed and delivered has accelerated. Traditional barriers such as cost are lower than ever for machine learning, AI and visualization tools, meaning we should be able to do better than a 2D grid display and current input devices.
With cutting-edge technology available, the panel felt that the industry could think bigger and better for the client – and go ahead and develop it. On how the industry could collaborate to achieve this, the consensus of the panellists was that participation and input as a broader community come into play through joint partnerships, testing and refining innovation with use cases, focus groups, and customer labs.
Where should innovation focus?
The panellists agreed that the focus should be on improving, extending, and complementing the skillset of the trader. By augmenting traders via technology, anything that is a deterministic path, meaning that there isn’t any discretion from the user to go one way or another, can be automated. Using automation in this way leaves vendor and internal IT development efforts to focus on adding value in the other areas of workflow that require innovation.
For example, how can order flow be presented in different dimensions using visualization to help traders understand the data, and what mechanisms can be used to solve the friction points in the trading workflow.
Practical applications of disruptive technology to trading workflow
Discussion on the panel turned to the practical applications of disruptive technology to a trader’s workflow to remove friction points. Incorporating machine learning, for example, using an internal recommendations engine, could reduce friction for the user. Fundamentally, delivering contextual and actionable information – with an EMS used to interpret it – could enable deterministic actions in the background and present the information to the trader to decide. The trader becomes the pilot in this situation, almost within a cockpit-style set-up. This approach makes the technology and data work for the trader, rather than trader hunting round, logging into multiple solutions or data sources or platforms.
Innovation impacts the battle to attract talent from other industries
Finally, with the “battle to attract talent” an ongoing hot topic within the industry, the discussion turned toward the need for visible and attractive innovation to return as it can have a knock-on effect on areas outside of a buy-side firm’s core business and the industry in general.
For example, there has been a drive to attract Silicon Valley organizations and employees to the industry. To be an attractive proposition, the people moving from or who firms want to draw from Silicon Valley wish to see that they are joining a forward-thinking space open to new ways of working and driving innovation.
Interested in learning how FlexTrade can help?
Whether you are looking to automate your fixed-income processes or consolidate multiple EMS solutions onto a single, scalable, multi-asset platform, we would be delighted to discuss your requirements.
For further discussions, please contact:
Dan Enstedt – VP – Business Development – EMEA – Dan.Enstedt@FlexTrade.com