Imagine this, the head of equity futures for one of the world’s largest asset managers is trying to navigate clients through the worst trading day since the 2008 financial crisis. Dow Jones futures tumbled more than 1,300 points, and executing brokers are subsequently scrambling around trying to work out how to fairly allocate an order for over 1,000 Dow futures across multiple funds. Sound familiar?
It is hard to believe, but it is a year on from the COVID-19 induced global volatility that reinforced just how painful the give-up process is, and the impact on operational resources when things go wrong. This isn’t a new problem either - give-ups have been a thorn in the side of market participants for decades.
Typically, asset managers placing and managing large orders across multiple funds can only allocate across these funds once they know the final quantity and average price of the entire order. Sometimes, it is the choice of the asset manager in terms of how long it takes to complete an order. This can be achieved through using algos, good ‘til cancelled (GTC) orders, or limit orders that sit at the edge of trading ranges – which can create a huge backlog of unallocated fills.
In addition, while an asset manager may be highly efficient in the allocation process during times of peak volatility, there could still be multiple allocations being communicated within minutes of the market closing. This creates an entire myriad of problems, with which the industry continues to wrestle.
Even if the asset manager allocates early in the day, the challenge for executing brokers is to identify the exchange fills (executions) associated with a single order. These executions at different price levels must be average priced before they are given up. To compound the challenge, in keeping with their mandate, asset managers are executing multiple orders during volatile periods to manage the risk within their portfolios.
Executing brokers play an important role by providing buy-side clients superior execution quality through strategies that reduce the market impact of buy-side activity, but often get hit with a hefty capital charge when the allocation of give ups are not successful. They must clear these overnight and absorb the cost with no recourse to pass on the charge. This poses a risk to smaller executing brokers, in particular. In addition to average pricing complexities, inconsistent data models, and the lack of common symbology all complicate the allocation and matching process for all market participants.
Clearing brokers also are on the hook for clearing trades that are covered by a give up agreement but have limited visibility or control of the upstream process. The industry challenge is more than just inefficiency in the give up workflow. Checking give up agreements and commissions are dealt with at the clearing member’s end of the workflow where timing and lack of quality data conspire to make trade acceptance hazardous and resource hungry.
Moreover, issues can occur due to the sequential nature of the give up workflow where trades are still sitting with the executing broker before the clearing broker accepts them. Fills accumulate on the executing broker’s account at the clearing house until allocated. Once a client disseminates its allocation, the client remains in the dark until the clearing broker confirms the trade back to them. One hiccup in this workflow will delay or prevent the give-up from completing. During this process, the trade is cleared in the eyes of the clearing house but is not cleared from the perspective of the executing broker or asset manager – which leaves unallocated exposure. All the while, the client is oblivious to any issues.
The goal of any process improvement should be to reduce the operational, financial, and capital cost for executing brokers and must give the buy-side client real-time transparency into the status of the executions and control over the allocation of the risk to the correct accounts at the clearing brokers.
For the clearing broker, the process must provide real-time visibility into give-ins so the members can assess the risk of the positions in a timely manner. Improved transparency and greater control of risk will ensure timely processing of give-ins. Several CCPs provide standardized and real-time workflows for average pricing, give-ups and give-ins that serve as a good foundation to meet the goals of the buy-side, executing broker, and clearing
broker. Each participant has a crucial role to play, and it may simply be a case of re-assigning responsibilities to the corresponding change in the workflow.
The exchange view of the trade should remain the immutable record, but the buy-side clearly group and reference it from a very different perspective. Relatable data points, like common order IDs, from all sides would allow the two perspectives of immutable record versus a client copy of the allocation, to be matched.
Traiana has an extensive network of executing and clearing brokers that service over 100 buy-side clients. Our established ETD ClientLink service not only normalizes client allocation messaging but enriches them with fills from the executing broker. The service also manages the nuances between different broker requirements, helping to negate complexities arising when dealing with multiple executing and clearing brokers.
We have applied in-depth industry knowledge to encourage change from buy-side partners to help allocation processing. A key part of this is the work we are already doing to capture relatable data from all sides in order to unlock efficiencies. Traiana are extending existing ETD ClientLink functionality to meet many of the challenges under industry discussion, with a view to utilizing new technology and services as they become proven. As illustrated above, buy-side clients need flexibility, and it is impractical to constrain their needs to achieve the operational efficiency of timely allocations and give-up processing. We at Traiana believe we can bring operational efficiency, transparency, and timely processing whilst giving buy-side firms the necessary flexibility to meet their mandates.
Conversations with multiple industry participants indicates this approach as the most pragmatic and expedient way to solve the functional issues. Our experience in the reformation of OTC clearing workflows, only adds to the support of our participation in this complex debate. Success in achieving these goals requires us to collaborate on designing the workflows with buy-side clients, executing brokers, and clearing brokers and leaves the door open for other service providers to join forces to solve. What is becoming increasingly clear, however, is the transformation of the workflow should be the main goal for all parties. As an industry, we need to ensure that we let the workflow determine the technology, not the other way around.
Joanna has served as Global Head of CME Group’s Traiana since June 2019. She is responsible for the strategic direction and the day-to-day management of Traiana’s global fintech portfolio including trade processing, credit services and trade lifecycle. Prior to this, Joanna served as Head of Product for NEX Optimisation where she focused on optimising revenue and maximising technology innovation for NEX Group’s six pre and post trade businesses. Before this Joanna was Managing Director and head of Product for Traiana.
Joanna is an active member of the CME Group Optimization Services Executive Team. She has 30 years’ experience in investment banking, working predominantly in the Exchange Traded Derivatives (ETD) space, with prior roles including Global Head of Client Relationship Management, Head of Operations and voice broker.
CME Group’s Traiana operates the leading market infrastructure for post-trade processing and risk management across asset classes and provides client service and risk management technology across the financial sector. Global banks, broker/dealers, buy-side firms and trading platforms use our cross-asset class services to automate risk management and pre-trade/post-trade processing of listed and over the counter transactions. Traiana’s network is comprised of the global financial community’s leading voices – providing insight, thought leadership and connectivity.