The Futures Industry Association (FIA) organized their 31st Annual Futures & Options Expo in Chicago last week. With 147 distinguished speakers and over 6000 registered attendees, the gathering brought the biggest players in the markets together to address current market challenges, hot issues and changes in the industry. The conference featured keynote speeches such as one by U.S. Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad, panel discussions looking at how MiFID II will impact U.S. markets and sessions focused on innovation in the derivatives industry.
CFTC and automated trading
CFTC Chairman Massad kicked off the conference with a packed room discussing what the U.S. Commission is doing in terms of automated trading, among other topics. He noted that the CFTC will consider proposals related to automated trading that would be designed to address potential market disruptions, not market structure issues, and that they would be principles-based.
“We are considering requiring further pre-trade controls, such as message throttles and maximum order size limits. But we will not prescribe how those limits should be set. We may also propose requirements pertaining to the design, testing and supervision of automated trading systems. We are considering measures such as ‘kill switches,’ which facilitate emergency intervention in the case of malfunctioning algorithms,” said Chairman Massad.
He also spoke about the requirements at the exchange, clearing member and trading firm levels.
“We are considering whether to require proprietary traders who access the market directly and who are using automated trading – to register with the CFTC. This would ensure that all those with so-called ‘direct electronic access’ to our markets are complying with pre-trade risk controls, testing and other requirements,” he said.
He concluded his discussion on automated trading by inviting feedback from the industry on this proposal.
While the U.S. markets are adjusting to their own regulatory requirements, if market participants have operations in Europe, they will also need to be concerned about the second Markets in Financial Instruments Directive (MiFID II). FIA put together a panel looking at how US firms are approaching this challenge.
To put things into perspective, one of the panelists compared MiFID II to the U.S. Market Access rule or Reg NMS. Reg NMS is a group of proposals that came into effect in 2005 that was designed to modernize the regulatory structure of the U.S. equity markets and focused on order protection, intermarket access, sub-penny pricing and market data. MiFID II requires, among other things, the implementation of risk management controls and supervisory procedures for those with direct trading access and prohibits unfiltered or naked sponsored access to exchanges or alternative trading systems.
Under MiFID II, panelists explained that firms trading European products need to figure out how things will change under the directive. While there is much uncertainty, the panelists told firms without direct market access (DMA) that they will experience indirect effects and to expect more capital and control requirements. Algorithmic traders as well as high frequency traders, which according to the panelists need to be investment firms under European rules should also expect more high level requirements such as testing requirements related to connectivity and volume. Finally, firms with European exchange memberships were advised to evaluate how important the markets were in terms of business strategy due to the unknown regulations still to be determined under MiFID II.
With this much uncertainty, one of the only things confirmed by the panelists is that firms impacted by MiFID II will need to have a solution in place ahead of the, for now, January 2017 deadline.
Investing in Innovation
One of the most interesting sessions at FIA Expo this year was a panel looking at innovation in the industry. The panelists focused on regulation and Washington’s impact on innovation.
With Wall Street absorbed in regulation, some panelists believe that disruptive technology will come from industry outsiders such as Apple and Google, who have footprints in the FinTech space.
Others believe regulations have been a driver for change. Brendan Bradley, panelist and Chief Innovation Officer at Eurex, sees banks using a new innovative technology concept to meet regulatory requirements.
“For banks to meet regulatory requirements, they should consider focusing on controlling a core piece of technology but then working with new FinTech technology providers that feed into that core piece within a standard API environment,” said Bradley.
At Itiviti, we agree with Bradley’s idea of new technology and call this the buy AND build approach. We discussed this concept in detail at one of the final sessions of the conference looking at next generation trading platforms. Itiviti Americas’ President Jesper Alfredsson talked about how we have seen many clients at banks and proprietary trading firms buy Tbricks by Itiviti components, or apps for sophisticated functionality, and build them into their existing infrastructure. Itiviti’s solution enables firms to take a step back and focus on their core business while taking advantage of customized, innovative trading solutions.
With FIA Expo 2015 behind us, it is clear that the derivatives industry is gearing up for more change. While some industry participants believe regulation may have slowed down innovation, others believe it is a driver for modernization. Either way, firms have the option to look outside of their in-house technology staff for cutting edge solutions and it looks as if this market is ready for new ideas.
Blog The fast pace of derivatives markets makes their participants a demanding group. Derivatives traders must be flexible to succeed, and also need functional capabilities in their technology such as speed, global access and powerful analytics. They confront these needs in an environment affected by new regulation, plus more demands for market access and lower costs. […] April 27, 2017
Blog In the ongoing pursuit of efficiency and cost awareness among market participants, trading technology is often at the center of attention. Still there is at least one key function in trading systems left largely untouched by productivity and streamlining measures, and that is testing. Manual testing of trading infrastructure solutions remains prevalent within today’s financial […] April 20, 2017
Blog The ability to respond rapidly to a new opportunity is a prerequisite for success in derivatives trading. Adding access to a new exchange or electronic execution venue, support for a new security, or compliance to the latest regulatory wrinkle is essential to making sure opportunities are realized and profits are made. As a result, agility […] April 11, 2017
Automation & Testing Whether you are deploying FIX or proprietary protocol components within trading systems, thorough testing is crucial to success. Not only do you need to test your systems for execution venue driven events but also for managing the client flow. Manual testing is a costly and error-prone process that can be significantly improved and accelerated through automated testing. Automated regression […] April 6, 2017