Search For Alpha Leads Far and Wide

Terry Flanagan

With the market-beating return known as alpha arguably more difficult to generate, asset managers have looked to diversify their offerings across asset classes, and have gone from offering equities only or equities and options only to offering a wider array of investment choices.

“Pressure in identifying alpha has put more pressure on the process of retaining alpha through the trading function,” John Adam, global head of product management at trading systems provider Portware, told Markets Media. “The harder it is to find alpha, the further afield the asset managers in the buy-side community in general are going to look for assets that have not yet been identified to which there is not yet a correlation with the rest of the more established market.”

This has led to an upsurge in foreign exchange, making it increasingly important for a standard language to support continued automation of trading in FX, including measuring transaction costs at the point of execution.

The FIX Trading Community has extended the Trading Enablement Standard Initiative (TESI), created last year to bring the FIX messaging standard protocol to fixed income, to the FX market, part of a wider TESI roll-out to standardize communications across asset classes, reduce operational risk and enable more cost-efficient electronic trading.

John Adam, Portware

John Adam, Portware

“If I have ten banks, the last thing I want is to have ten different standards for how I am receiving that data, how I am capturing that data and then go through a massive exercise in my data warehouse to normalize it,” said Adam. “Having it in one standard enables me to capture it in a single place and come up with a composite TCA model which is necessitated by simply the way that the FX market works.

TESI provides a standard for on-boarding clients to trading venues for OTC products such as foreign exchange and fixed income, and for keeping track of individual customer preferences such as pricing streams.

Historically, banks would on-board their clients on to a multi-dealer platform such as Currenex, FXall, or Hotspot by manually entering all the information about their clients on to the multi-dealer platforms or the platform itself would do that on behalf of the sell-side dealer.

“There are people who are today manually updating and entering this kind of information, and in today’s age where so much of the trading function has been automated, why hasn’t the same kind of level of focus and scrutiny been placed on the administrative functions around the trading?” Sassan Danesh, co-chair FIX Trading Community OTC Products Committee and managing partner, eTrading Software, told Markets Media. “That has been a backwater.”

Adam spends half of his time in the field working with customers to develop multi-asset TCA. “If you talk to any head of fixed income, or head of FX, they say, ‘I would love to have a composite with multiple benchmarks because I need to factor what is my true rate, what is the rate that was available to me at the time, what is the indicative rate from a third party’” he said. “Everybody wants to go but there just hasn’t been a road paved between here and there.”

Having a model of transaction cost analysis has become a requirement for any institutional trading desk and, in many cases is a legal mandate. “Certainly in the case of MiFID II, I am expected to have a best execution policy and to adhere to that,” said Adam. “Even if there wasn’t a regulation, my plan sponsors are certainly going to demand that I have those kinds of controls around the trading desk.”

Featured image via treety/Dollar Photo Club

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