10.17.2014
By Terry Flanagan

Basel III Drives Data Needs

With the Basel III capital regime, capital charges now need to be assessed at the transaction level, which is driving a need for execution management systems to access counterparty, prime broker, and custodial data.

“This is a downstream issue for every single asset manager,” Bob Sloan, founder of S3 Partners, a provider of data and analytics to banks and asset management firms. “That conversation is being had downstream from the banks, and it does not matter whether you are on the long-only side of the fence or whether you are on the hedge-fund side of the fence.”

Sloan suggests picturing market structure as an hourglass. At the top of the hourglass are some 20,000 long-only pension funds and mutual funds, who deposit their assets with an agent (custodial) bank. At the bottom of the hourglass, are 5,000 or so hedge funds who deposit all their assets with a prime broker.

“The agent banks and the prime broker are basically swapping positions back and forth trying to get the best price discovery,” said Sloan. “What we do is service that clientele to help them better organize the information.”

S3 has partnered with Portware, a provider of multi-asset trading systems, to deliver S3’s Blacklight counter-party intel analytics platform to Portware’s clients.

“Portware understands the same thing that we see, which is, in equities trading, it used to be that the clearing/financing cost versus the trading/commission cost were basically separate universes,” Sloan said. “What the new regulation really does is throw them right together. Part of executing a trading strategy will be to understand where that buy or sell order winds up, and the capital charges associated with it.”

Because capital charges can be many times the commission cost or the market impact of buying or selling a security, “we might see part of a trader’s decision making process to be understanding these costs in a much more granular way.”

Portware clients will be able to solve for Basel III-driven trading requirements using S3’s Prime Information Exchange (PIX) protocol, which captures and standardizes prime, custody, swap and contractual data, the companies said in a release.

“If you think about the history of algorithms and electronic trading, it could not have happened until you had a FIX protocol,” said Sloan. “One of the things that we have done along the way is create a market protocol for the prime services world. We call ours PIX, which is prime information exchange. Until you standardize that data, you cannot get technology to work to where you can bring the costs down to the transactional level.” Most of S3’s clients save 3 to 5 hours a day using Blacklight, he added.

Portware CEO Alfred Eskandar said in a statement: “We share a common goal with S3 – to enrich our clients with valuable analytics that are actionable. Portware’s global clients will benefit from Blacklight’s approach to data standardization, which together with our trading automation solutions, will allow clients to be more informed about the trades they make every day and their true cost impact.”

Featured image via Dollar Stock Photo

Related articles

  1. Agency broker moves beyond execution to offer a broader suite of services.

  2. Algorithms have become more prevalent in the spot FX market.

  3. Congress Unlikely to Act on HFT

    QB’s Algo Suite for futures market trade execution is also being co-located to HKEX.

  4. Breaking data silos is key to deploying automation beyond 'nuisance' orders.

  5. They can be used on quantum hardware expected to be available in 5 to 10 years.