Experts Forum: Ops execs’ forecasts for 2017

We asked operational experts what technology they plan to focus on next year, why and how to prepare

Fund Operations reached out to over 30 operational executives to find out what types of technology they plan to focus on next year and why, as well as how their operational teams can prepare. This included those working at the fund level, third-party administration level and at a couple of vendors….

AI becoming just another tool in the trader toolbox

In the collective mind, the trading floor is often depicted as a chaotic and noisy place where traders shout out orders at the top of their lungs. The reality is much much quieter. Where humans used to shout, bits and bytes now move

silently.

The process started when trading shifted from manual, voice-based actions to computers. Then it developed further when automated order routing was added, saving time and resources. Then, automated trading systems rose in popularity,

responsible for about 75 percent of today’s market volume.

In recent years, with the advent of cheap computational power, the next step of automation is trading automation driven by AI or machine learning. It is here that popular media propagates fears about the ultimate takeover of

machines.

“It feels like some of the buzz and the hype has died down, which is an interesting stage in the lifecycle,” said Tom Doris, CEO of OTAS Technologies, a market analytics and trader intelligence company. Now, he adds, we can get back

to looking at the problems that technologies like these are supposed to solve.

A typical trader, explains Doris, has too many orders in his queue. Faced with this, he will start processing them from the top and work his way down to the bottom. He might linger a little bit more on those that are more volatile or

require more attention, but it might be hard to spot those among the noise.

“The market is generally pretty boring,” Doris said. “If you have 100 orders, 95 of them are perfectly ordinary. It is all very predictable. Your task as a trader is to find those 5 percent where something unusual is happening.” OTAS’

technology is able to create a predictive model of how a stock should behave, and alerts the trader when unexpected information changes a stock’s behavior. The technology can be plugged directly into an Execution Management System, so

that the trader can act on those alerts instantly.

The trend over the last couple of years was towards increased automation, attempting to take humans out of the loop. Now, it’s understood that there is a limit to what a trader can do systematically.

“You want humans looking at situations where there is a human story going on,” Doris explained. For example, when a stock starts to rally because of aggressive buying, only a human with a good understanding of the risk landscape and

the company’s story can discern if this is informed flow or a trend that may revert.

There have been several hedge funds priding themselves in the use of AI software to guide their decision making, including Bridgewater Associates, Renaissance Technologies, D.E. Shaw, and Two Sigma. Many more firms describe themselves

as “systematic”, meaning they base their decision making on computer models, which might not be driven by AI.

Perhaps the most common approach to AI in investing is the use of natural language processing to be able to make sense of unstructured market data and the use of neural networks to identify patterns, relationships and hidden

trends.

AI is seen now more as another tool in the toolbox of traders, rather than a magic bullet, Doris concluded.

OTAS Technologies partners with ExtractAlpha to provide enhanced trading factor analytics

LONDON, NEW YORK, 03 October 2016 – OTAS Technologies (OTAS), a specialist provider of market analytics and trader intelligence, today announced it has partnered with ExtractAlpha the independent fintech research firm to provide unique, actionable trading factor analytics. The content will be available to buy-side and sell-side clients including quants and asset managers.

ExtractAlpha’s Tactical Model is now available within OTAS Core Summary allowing clients to benefit from rigorous quantitative analysis built for alpha generation and superior trade timing. ExtractAlpha’s quantitative models are designed for institutional investors to gain a measurable edge over their competitors, optimize trade entry and exit points, and avoid crowded trades. Currently ExtractAlpha has three stock selection models for U.S. equities, with further models and global coverage to follow.

“We partnered with OTAS as together both companies can provide a unique offering of trading analytics to the market that isn’t available through any other company. OTAS’ data sets are extremely valuable and will help our investors profit from this exclusive source of information,” said Vinesh Jha, CEO of ExtractAlpha. “With the proliferation of new data sets available today, forward thinking managers will now have an opportunity to be ahead of the game.”

“OTAS is proud to be working with ExtractAlpha, adding to the growing list of integration partners we are already working with,” said Tom Doris, CEO of OTAS Technologies. “OTAS is continually looking to extend our list of strategic partners, ensuring clients are armed with the tools they need to be as successful in their trading decisions as possible. With this integration, clients will now be able to take advantage of this unique analysis allowing them to make trading decisions in a quick and efficient manner.”

Stock and bond bull runs show bubble-like qualities

David Oakley considers the consequences of quantitative easing and ultra-low interest rate policies

“We are part of the biggest financial experiment in world history and the consequences are yet unknown.”

These were the words of Lord Rothschild, scion of the Rothschild banking dynasty and chairman of RIT Capital Partners, the investment trust, last month in his semi-annual financial statement to investors.

This financial experiment has distorted markets and propelled equity and bond prices to record highs. Central bank quantitative easing and ultra-low interest rate policies have fuelled simultaneous bull runs in stocks and bonds.

It is hard not to jump to the conclusion that these bull runs have bubble-like qualities. In other words, some asset prices have gone up too much and must burst at some point.

Valuations in two particular markets look extremely stretched: US large-cap equities and government bonds.
The biggest companies in the US are trading at historically high valuations last seen in July 2015, just before the market plunged because of worries about China’s economy, says OTAS Technologies, the data company.

Of the top 500 companies in the US, the median valuation is trading at an 18 per cent premium to the 10-year average.

The risks of a violent reverse, therefore, may be in the large US companies on the S&P 500, which is trading around all-time highs, rather than other markets. Valuations in small and medium-sized US companies and European stocks are well below their peaks.

James Maltin, investment director at Rathbones, the wealth manager, says: “There is a wide gap in valuations between the large-cap US stocks, and the mid-caps and smaller companies. QE [quantitative easing] has driven the big stocks higher.

“It is the US large-caps where the valuations are artificially stretched by QE. If you scratch below the surface to the smaller stocks, you will find value.”
Although he is not warning that these large US stocks will sell off, he is not buying them at these prices and valuations.

Other fund managers are more worried. The speed of the upwards move in equities since the UK voted to leave the EU in the June referendum has taken them by surprise. Matthew Beesley, head of global equities at Henderson, the investment group, says: “Equity markets are on a giant piece of elastic that could snap at any moment.”

Adding to the chances of a sudden reverse are a large number of equity investors who are doubling up on high share prices by selling put options too, says OTAS.

This commits them to buying the shares should prices fall. These investors are exposed to an equity market sell-off through both their ownership of the stock and the recently written put options.

In bonds, valuations look just as stretched, particularly in the sovereign markets, where the biggest price distortions can be found because QE programmes have largely involved buying government debt.

Government bond yields, which trade inversely with prices, have been driven down to record lows by QE purchases and ultra-low interest rates. According to Andy Haldane, the chief economist at the Bank of England, interest rates might be at the lowest levels since the beginning of civilisation, 5,000 years ago.

Some fixed income investors are also issuing apocalyptic warnings. Bill Gross, the lead portfolio manager at Janus Capital and co-founder of bond house Pimco, says inflated fixed income prices and ultra-low yields have created a “supernova that will explode one day”.

Mr Gross may be painting an overly pessimistic picture. It is difficult to forecast where the financial experiment might lead us.

As Lord Rothschild also said in his financial report last month: “We are in uncharted waters and it is impossible to predict the unintended consequences of very low interest rates.”

However, the sensible fund manager should take some form of defensive action. In the case of Mr Maltin, he has taken on his largest position in gold bullion.

Trading 30 per cent below its 2011 peaks, gold looks good value. It is the ideal hedge against market volatility and inflation, which the great financial experiment may one day unleash.

David Oakley is the FT’s corporate affairs correspondent

Is Brexit Really to Blame for Falling Bank Shares?

First published in Institutional Investor on August 4, 2016.

Corporate chieftains have a ready-made excuse for downgrading earnings expectations. The U.K.’s vote to leave the European Union is providing cover for a range of events that would most likely have happened anyway.

For those looking for cracks in the edifice, the fall in bank share prices following the June 23 Brexit vote was evidence of a seismic event. Bank share prices, however, had rallied ahead of the vote, even as earnings estimates continued to slide. The postreferendum adjustment was merely a return to trend.

Estimates have fallen further in recent weeks. This decline stems not from the Brexit decision but from the Bank of England’s response to the event. The pound has fallen, which has real implications, and some cross-border funding of investments is subject to a new round of scrutiny. Yet there is no evidence from equity markets of the uncertainty that is regarded as a call to action.

Financial markets have a gauge of uncertainty in the volatility of future prices that is implied by options. These securities allow investors to make predictions about how much prices will move over specific periods. The striking feature of the run-up to the U.K. referendum was the stability of predictions that one could infer from equity options, as investors bet that there would be little disruption to prevailing trends. The rapid fall and recovery in U.K. stock indexes in the aftermath of the vote are testimony to the accuracy of these predictions.

For investors, it is important to follow those with skin in the game. As the Brexit furor has given way to hyperbole surrounding the election of a new president in the U.S., such scrutiny is doubly important.

For all the heat and light of the political theater, expect a smooth ride in the equity markets over the coming months. The overarching reason for this is an understanding that the Federal Reserve and its fellow central banks have got investors’ backs. Each time volatility rises, authorities respond with monetary palliatives that have the desired effect of suppressing risk. Volatility is uncertainty, and the more certain investors are about the future, the higher the price they pay for securities.

Low interest rates depress bank profitability, though. That factor, coupled with mounting capital requirements, reduces the availability of loans. Thus, one important mechanism by which confidence in financial markets spreads to Main Street is broken. By responding to political events with promises of more easing, central banks depress the outlook for commercial banks further, even as they provide support for stock markets.

Monetary policy is turning banks into utilities more effectively than is accomplished via regulations. With discussion of negative interest rates out in the open, the prospect of banks charging interest on deposits increases. Commercial customers in parts of Europe are already facing such costs. The beneficiaries will be in the nonbank financial sector. Because these so-called shadow banks are lightly regulated, this result could mean further loosening of the links between central bank activity and the real economy.

Prolonged low interest rates also threaten the profitability of the insurance industry, because companies and their clients in that sector share the pain from the minimal returns on savings. The increasing numbers of middle-class savers fearing for their long-term financial security swells the ranks of those prepared to vote for whatever change is on offer, including Brexit and a businessman candidate for U.S. president. Thus economic policies designed to preserve the status quo may instead be having the opposite effect.

One definite risk to business as usual is being faced by London’s bankers. Access to the single market is at risk if the U.K. is denied the passport rights that allow institutions in one EU country to operate in all others. Executives have responded to the U.K. vote with horror at the prospect of having to abandon London for a European city without the same infrastructure and where English is not the common tongue. For all the grandstanding of politicians around the how-to-Brexit negotiations, we might expect the residency of U.S. power brokers to be the driving force behind an eventual compromise.

Artificial Intelligence for the Human

Theoretical hurdles are likely to prevent us from creating any time soon robots with human-level intelligence. But the practical applications of machine learning and artificial intelligence in capital markets can provide tremendous value, suggests Tom Doris, CEO, OTAS Technologies. Speaking with Terry Roche, principal and head of fintech research, TABB Group, Doris examines the applications of A.I. to market data and how it can help augment traders’ and portfolio managers’ performance. He also discusses the challenges of combining the domain expertise of traders and portfolio managers with computer science and the democratization of A.I. and big data technology.

OTAS Partners with Wall Street Horizon to Deliver Decision Support Solution

OTAS Technologies, a multi-asset analytics and solutions provider for the financial services industry, has announced a partnership with Wall Street Horizon to allow its institutional investment and trading clients access to corporate event dates and financial information.

The datasets combined with OTAS’s analytics can assist clients with capitalising on event related volatility and avoiding the risks.

The partnership means that Wall Street Horizon’s corporate event information will be made available through OTAS’s Portfolio Analytics application which was launched in late 2014. The company also extended its market intelligence and analytics suite to Thomson Reuters Eikon in October 2015, as reported by Finance Magnates.

Tom Doris, CEO of OTAS Technologies, said: “We are constantly striving to streamline our clients’ trading workflows and provide them with the information needed to make the fastest and most informed decisions. Wall Street Horizon was an obvious partner for us as they share this mission and go to great lengths to ensure their data is the most accurate available.”

Wall Street Horizon’s range of forward-looking and historical corporate event datasets include earnings dates, dividend dates, options expiration dates, splits, spinoffs and investor-related conferences. These datasets combined with OTAS’s analytics can assist clients with capitalising on event related volatility and avoiding the risks.

Bruce Fador, President of Wall Street Horizon, added: “We are excited to be working with OTAS to make our data easily accessible to their impressive list of institutional clients and partners. Their portfolio and trading analytics applications are quite exceptional and we believe that our data combined with their tools make a very compelling decision support solution.”

Channeling Darwin: Big Firms Tackle Innovation

Steve Grob, director of group strategy at financial technology provider Fidessa, said large firms can be just as innovative as smaller rivals if they borrow from the principles of natural selection to take advantage of their scale and resources.

Grob told Markets Media: “Innovation is a function of resource and effort so larger firms should be better at innovation if they are organised properly. Most large firms have the resources but they are poorly co-ordinated and they need to focus on a smaller number of areas.”

He has written a paper, “Natural Innovation: A theory of innovation for larger firms in financial markets”, inspired by Charles Darwin’s theory of evolution by natural selection. Darwin’s premise was that a random mutation that favours a particular species’ survival is automatically selected and makes it through to the next round of evolution.

“Natural selection is the most creative force and I wrote this paper to see if there were some self-evident truths which could hang together and be implemented around Fidessa,” added Grob.

He said smaller firms have an advantage in being able to develop and deploy products more quickly, more commercial flexibility and that customers are more forgiving of smaller, new suppliers.

Large firms can compete by acquiring newer innovative rivals, but the results have generally been disappointing; by setting up innovation committees, incubators and labs, which can become strangled by bureaucracy while a third approach is to set up a separate investment business to finance new firms, although this indicates a corporate shift into venture capital. The paper argues that larger firms need to play by different rules.

“Innovation doesn’t work if it is done by committee or if it is the responsibility of ad hoc teams and initiatives without a focus,” Grob added. “The fanfare over incubators has waned as innovation needs to be in the DNA of a firm. Everyone needs to be cognizant of innovation and it needs high level executive support.”

Innovation can come from a steady stream of intuitive improvements and can be a function of sheer effort and resource. However large firms need a mechanism to simplify, direct and focus these efforts and repeatedly communicate the set goals to all staff.

For example, a firm might decide to focus on a new asset class, area of workflow or the application of a specific new technology to an existing business line. This should be picked up by the technical, commercial and business thinkers and turned into incremental, innovative – yet directed – evolution. For example, at FIdessa the firm started writing in different programming tools in order to think about problems in new ways. In nature not all species will evolve successfully and similarly, not all business innovations will work.

Grob said: “Measurement is crucial. It is possible to have concrete quantitative goals but they don’t fit into a typical management spreadsheet”

Goals and targets such as “grow sales by x% per quarter” or “reduce operating expenses by y%” work for established business lines but not for innovation. Better goals and targets for innovation are more incremental and need to reviewed more regularly, such as “prove the efficacy of the core business idea to five potential customers” or “build a prototype in a new technical infrastructure.”

Nature is also full of symbiotic relationships where two seemingly diverse species find a way to cooperate to their mutual benefit.

“At Fidessa we learnt that evolution is not precious and it did not matter if ideas did not come from within the firm,” said Grob.” In the fourth quarter we launched a partnership program as our customers told us they would use new technology if it was embedded in the Fidessa workflow.”

The partnership program allows multiple vetted third-party applications to be integrated into Fidessa’s workflow so that innovative new firms can meet the security, scale and resilience requirements in capital markets.

The first partner in this program was OTAS Technologies, which provides a range of market analysis tools in live trading conditions. The OTAS tools sit alongside Fidessa’s Order Performance Monitor. James Blackburn, global head of sell-side equities product marketing at Fidessa, said in a statement: “They provide traders with detailed market micro-structure analysis and the ability to drill down and understand why their orders are trading the way they are, as well as what factors might be influencing them.”

Tom Doris, chief executive of OTAS Technologies, told Markets Media that the firm was launched with idea that incumbent trading platforms would eventually open up to third-party content.

“We had no idea whether that would take two, five or 10 years or whether it would happen in a piecemeal fashion or all at once,” Doris added. “Fidessa saw the logic of doing this and took the risk and the industry is fortunate they are prepared to be a good citizen in developing the ecosystem. They have taken the leap and had the intellectual conviction to anticipate trends.”

Doris said OTAS benefits from tapping into Fidessa’s distribution channel, which is a tremendous potential accelerator, and from Fidessa’s reputation for being reliable and robust.

“Yet they have been willing to take risks and open up their platform,” Doris added. “Other platforms have been more protective and took longer to realise that third-party content will not disenfranchise, but will strengthen their offering. Fidessa made the right move and in the last six months everyone else had been running to catch up.”

OTAS now has partnerships with five trading platforms and expects to have another four by the end of this year. Doris said financial services can learn lessons from other industries where third-party independent developers produce apps demanded by users and OTAS would like to have an API (application program interface) to allow more content providers to easily join their platform.

“We have taken a lot of features from the App Store model such as the need for access to an API, which we might have to build ourselves, and centralised tracking and user entitlements,:” Doris added.

This month Fidessa announced it has signed a partnership agreement with Alpha Omega, which provides FIX-based solutions for affirmation processing through its post-trade service.

Alpha Omega, which is used mainly by the fund managers, can access the sellside through a single conformance to Fidessa’s Affirmation Management Service, to significantly reduce the time taken to on-board customers. The two firms have also agreed to collaborate on other asset classes, including derivatives.

Grob concluded: “Only time will tell if ‘natural innovation’ will prove to be the answer for larger firms, but it does offer an approach that plays to their strengths rather than those of the fintech newcomers.”

Sell-Side Technology Awards 2016: Best Sell-Side Analytics Product – OTAS Technologies

After establishing its position on the buy side as a proven provider of decision support and trading analytics, London-based OTAS Technologies announced in late 2014 that it intended to move into the sell-side space.

The strategy has apparently paid off as OTAS fought off fierce competition to secure the title as the best analytics provider to the sell side.

The role of analytics is both a desired and misunderstood one within the capital markets—while no-one wants to miss out on gathering and harnessing any data, many have little idea how to fully utilize the information they do have access to. It’s an issue of contextualization, as traders demand a seamless experience in which they’re receiving the right information at the right time and in the right context.

OTAS has positioned itself to address this demand with its suite of analytics solutions to provide live and intra-day advanced trade analysis and decision support powered by artificial intelligence and big-data analysis. The OTAS Core platform provides decision-support functionality; OTAS TradeShaper delivers pre-trade and “in-trade” analytics to traders; OTAS Base is an application programming interface (API) and visualization toolkit; and OTAS Views allows traders to create user-customizable views and analytics to help them make more judicious trading-related decisions. Users are able to select any combination from over 200 unique factors that can then be used to filter, rank and score a stock, as well as create an unlimited range of custom views.

By inputting orders manually or automatically through an order management system (OMS), users are able to factor in expected share price moves over the life of an order, the likely impact of the order on the share price, the level of risk aversion, and any other existing market insights. Alerts are sent to users to provide real-time support to identify whether to accelerate or slow down a trade in real time, based on statistically-backed information, pinpointing where risk lies on order pads or across trading desks at any given point.

In April, OTAS unveiled Lingo for Microstructure, a new extension of its existing natural language reporting technology. The service provides intra-day reports and analysis of stock activities covering the previous two years, available for both OTAS users as well as users of FlexTrade’s FlexTrader execution management system (EMS). Lingo also integrates with the Symphony messaging system, to provide traders with contextual analytics overlaying traditional transaction-cost analysis (TCA) data in a universal language to facilitate both pre- and post-trade decision making.