“There is almost no business that takes place over the internet at the moment, and there never has been” – A detailed look at market connectivity

B book firms with no contact with customers and an automated model have more than stirred the attention of regulators with regard to how customers are onboarded automatically, as the correct asset class and trading environment for their risk attitude, as well as the ability to know the client and establish identity – a very important compliance requirement – is very ambiguous. We look at market connectivity and how it all works

Use of the word ‘internet’ and the surrounding perception that the generic world wide web has been an empowering factor in shrinking the world’s financial markets business to the size of a global village in which every participant has multi-asset trading facilities at their fingertips from within their living room is more than just a bit problematic.

Despite the electronic trading industry being completely dependent on good quality and comprehensive connectivity between all participants from the Tier 1 banks and all of their internal departments right the way to the execution of a trade by a retail FX brokerage customer or futures exchange member, so little actual emphasis is placed on exactly how the communication between liquidity providers, counterparties, bank traders and end users takes place, and similarly, the subsequent reporting of activities.

Today in London, FinanceFeeds spoke in detail on this subject with Robert Powell, Director of Compliance at 40-year established financial markets connectivity company IPC Systems to look at exactly what brokerages and financial counterparties should be looking at when examining the structure of their market connectivity, and how to enhance their solutions to ensure effective compliance with directives such as MiFID II.

Mr Powell, who spent 11 years at Bloomberg as Global Business Manager within the firm’s Trading Systems division, discussed with FinanceFeeds the method by which connectivity to financial markets currently takes place and what evolutionary methodologies brokerages should investigate when looking at connecting to greater liquidity pools whilst at the same time increasing their ease of remaining compliant.

Robert Powell, Director of Compliance, IPC Systems

“When looking at the historic origins of this company, it is appropriate to say that it has been a large but hidden organization in the financial markets business that has been quietly providing vital services and solutions for 40 years. Looking at its heritage, IPC Systems grew out of the old fashioned need for a trader to speak to more than 1 person at a time. The classic view of a Wall Street or London trader with two telephones, one against each ear, is where our origins lie” he said.

“When this started there were very few firms that had the technology to have more than one telephone line open on their desk at the same time. We were there at the start, and have now been in the turret business for a number of years, hence the ability to connect multiple squawk boxes and manage them on devices alongside Bloomberg and Reuters terminals has been going hand in hand” explained Mr Powell.

“Currently, we have 149 of the top 150 Tier 1 banks as customers worldwide, right down to hedge funds with 5 mobile users on the EE network that need to be able to conduct voice recording, so we provide them simple and easy solution that can be set up in 24 hours and bill on a month to month basis” explained Mr Powell.

“Of the OTC firms that we work with, most are network customers, consuming network with end points, connected to the electronic trading side fo the business, however looking at the traditional voice trading solutions, everyone says voice is going away, and that the entire trading sector is becoming completely electronic. I started at Citibank as a paper trader, with an ICP turret on my desk, and used it every day” he said.

“Lots of people still need the telephony solution as well as the data solution. There is almost no business that takes place over the internet at the moment” revealed Mr Powell, referring to a widely misunderstood preconception that the internet carries trading activity globally. “There never has been, and anything that is done purely on the internet is usually not being executed, but is actually b-book order flow going to the dealing desk of another broker” – Robert Powell, Director of Compliance, IPC Systems

Mr Powell rightly emphasized that trade execution is a totally different process to ordering something from eBay or Amazon, and that many people do not realize what goes into making the financial markets stable.

“Relatively recently, there had been a trend in which many firms have attempted to make everything electronic, right from trade execution to customer contact, and look toward operating an environment in which nobody speaks to anyone” said Mr Powell. “This has been reversed now and it has been realized how valuable it is to be on the phone, maintaining a high touch relationship, both from a Know Your Customer point of view with regard to adhering to compliance directives and also with regard to ensuring that information provided between customer and institution is accurate and trades can be executed and reported properly.”

FinanceFeeds notices that there are certain retail FX companies which have majored on having absolutely no contact at all with customers, however they are b-book companies which have in many cases more than stirred the attention of regulators with regard to how customers are onboarded automatically, as the correct asset class and trading environment for their risk attitude, as well as the ability to know the client and establish identity – a very important compliance requirement – is very ambiguous.

Looking at the institutional and interbank electronic trading sector globally, in large well recognized financial centers, Mr Powell said “Approximately 85% of sales traders will have an IPC turret and Etrali device on their desktop. IPC bought Etrali and that solution now it is completely integrated and is especially important on the compliance side.”

“Given that a trader has a number of voice trades to do, we were originally part of this process from an analog perspective, and then became instrumental in the transformation to digital. We moved into this space and found customers needed reliable connections, and hence we all know that VOIP is excellent for many communication purposes, but not in a critical situation such as trade execution so we created a private network with 60 points of presence to offer connectivitiy across the internal divisions of institutions, for example for the London branch to talk to Sydney, Hong Kong divisions” explained Mr Powell.

“Currently, many customers are transacting business with each other, often using systems such as the Connexus LAN, WAN and WIFI system which is the industry’s largest private IP network, which has lots of advantages that are not available on a standard internet connection, such as secure and dedicated application deployment” said Mr Powell.

Connectivity is not just about market access, it is about compliance too – and work from nowhere

“In 2012 we moved into the mobile recording space” explained Mr Powell. “We now have recording on mobile networks in Singapore, France, the United Kingdom, Hong Kong and North America, a solution which was grown out of the need for organizations to record their customers calls, an especially important matter now with the reporting requirements stipulated by the MiFID II directive in Europe, hence there is all sorts of media that we now record.”

“To round up and increase this further, we launched the Unigy 360 system which is a TaaS (Telephony as a Service) solution, in which participants can talk directly to product manager and can work remotely with the quality of connectivity that would otherwise be very difficult to achieve. The quality of this is excellent, even though it is on a WIFI link, and it provides access to all lines, all squawk boxes at the trading desk, and the possibility for the sales trader to get in touch with his team at any time” said Mr Powell.

One of the Principals of a hedge fund I worked for many years ago used to pack all his equipment up on a Friday night, fly it all to Zurich, set it all up on Sunday and then do the same again on Friday the next week. The need for this disappears with Unigy 360, as it makes a total difference to the way people can work, hence this is a game changer” – Robert Powell, Director of Compliance, IPC Systems

Mr Powell explained that within an organization that needs trader telephony, a trader can have a physical device, and if they need an IPC turret on their desktop they can rent one, and service is all inclusive and consists of private wires, storage of data facilities, playback, and recording, the beauty of having one’s own private IP network being that data is pushed to areas that IPC prioritizes, hence avoiding internet related blockages and slowness.

“Use of messaging systems such as Bloomberg or Reuters means that information is less communicable than a phone conversation as it holds less detail” he said. Voice is still used massively in the investment management sector and among hedge fund businesses” said Mr Powell.

“In the OTC world, in the past there have been smaller providers, plus equipment manufacturers like MITEL who would provide a PBX system with a dial tone and the ability to make calls but there are literally only half a dozen that can get speaker channels across the global financial markets. In the old days, the larger organizations came to us as they needed the ability to deploy. It is no good going to a startup and asking for a turret system if they don’t have the ability to deploy 2000 units in London or New York” – Robert Powell, Director of Compliance, IPC Systems

Looking back at how this was an underlying dynamic in the development of today’s infrastructure, Mr Powell said “Quite often because of that, we didnt used to target the smaller end of the market. Some of the smaller buy side organizations, after cost cutting in 2008, went down to CISCO equipment and wouldn’t pay for turrets. What we are finding now is that a lot of smaller organizations like the TaaS soltuion. They may have 40 people in the organization, the rest just need a telephone, so we developed the chance to have a new profile for this, which is very different to an enterprise user that needs to make calls within his organization from his desk.”

“A lot of companies that want to replace old technology and give greater capability to traders and sales people. Working from home as a financial markets professional has been impossible, but now it is moot point because you can pop up a Unigy 360 app and get access to squawk boxes and lines, developed to be used on a broadband fiber optic network, hence there are a lot more possibilities and the aforementioned hedge fund manager who packed kit up every week and took it to Zurich would never need to do that these days” said Mr Powell.

Maintaining data within an integrated connectivity system

“I was involved in 14 of the 16 LIBOR cases for recovery and I can tell you most of the time these transgressions were the result of lack of professionalism on an individual basis rather than the inability to comply with the organization’s mantra and procedure” said Mr Powell.

“A great difficulty for most orgnaizations now is that whether they are keeping the right records and reporting the right trade information to be compliant with MiFID II. I can assure you we have had 90% of customers coming to us to increase their record retention periods, which had been as low as 6 months and now they need to store records for 5 years” said Mr Powell.

“How long records are stored often depends on the risk appetite of each firm. Most smaller organizations, especially in the UK, are retaining records now for 7 years because that is the Inland Revenue’s stipulated retention period” he said.

“Some of the larger banks are on destruction hold because of big cases like Enron and other similar aspects that require reference to archaic information, so they are not destroying data and are keeping it in purpetuity. Some banks are now thinking should the destruction holds be released, largely because it is really difficult to see how much mire regulatory bashing can be given again for the same data” said Mr Powell.

“People are getting their act together on unifying archives of data, and starting to use quite advanced tools for looking at that data. Two years ago, for example, there was not much conversation about speech, because that was considered unsurveillable. It was a very difficult matter, doing surveillance on recorded calls” he said. (At BT, operators doing that would often suffer from depression and be on long term incapacity leave – Ed).

“Overall” concluded Mr Powell, “This is an interesting space as number of technologies that have emerged and let us translate the voice that’s being spoken on calls into text. There are some that go into phonetic searching. Many banks have invested huge amounts into platforms that store email, instant messenger, Blackberry and Bloomberg data and they have keywords for surveillance, looking for irregular behavior. They now want to now move the speech detection into this area.”

“The beauty of our TaaS solution is that it provides managed speech analytics as a service, in that firms can turn it on for, for example, 5 traders and not for another 10 traders, giving them a chance to scale their deployment.”

Thus, connectivity is vital now more than ever, and London is the center of all global electronic trading and the infrastructure that underpins it.

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