Algorithmic Trading

There was extensive discussion around algos and recommended solution providers. Some members are currently prioritising algos in the Middle East, so were keen to learn about prospective partners and how their peers are handling issues with aggregation. This opened the floor to how well vendors accommodate lighter aggregation options and their capabilities around closing dates, with mixed feedback from the group overall.

On the whole, Credit Suisse, Jefferies and Morgan Stanley were praised for how they deal with different order sizes (“it’s as good as you can get!”), with Instinet and UBS also being recommended by the group.

In situations where custodians want to move shares, it can be much slower when using algos. Therefore, some members are relying on portfolio trading to make this work, advising that they would only use algos for small orders and to save time messaging brokers.

Other members use portfolio trading for most baskets and to future-proof the desk. Some are in the midst of setting up an algo wheel with brokers for small value orders in emerging markets, but otherwise, use portfolio trading for an extra pair of eyes and to minimise risk.

Market Enhancements

The group agreed that there have been noticeable improvements in India, such as a greater ability to do block trading. India are moving to T+0, which will mean more volume and commission from an exchange perspective. Furthermore, Hong Kong are looking to bring in omnibus accounts, but members stressed you will still have to send individual IDs.

When trading swaps, some members shared that it can be difficult getting the swaps back for dollars and FX. While they are predominantly automated, everyone does this process slightly differently. Moreover, it is challenging to send rates back when an order is cancelled.

Custodian and Counterparty Relationships

The group expressed that they are facing more custodial issues in the Middle East at present. Specifically, members have experienced problems with settlement structures not being updated and stocks being unable to move due to no power of attorney with local brokers. 

These challenges stem from limited communication, along with a need for messages to filter through to the correct stakeholders on the buy side. Despite their best efforts, our members feel that there is always too much manual processing around this type of event.

Some members rely on Redwheel to assess counterparty risk and exposure, i.e. when global brokers use local brokers and where the risk lies if something goes wrong. Members reported that global brokers can step away and leave the trade exposed to the local broker, so due diligence is needed to ensure that global brokers have overall responsibility.

Liquidity and Depositary Receipts

In terms of liquidity, some members are looking to broaden their broker list. This is considered to be relatively straightforward in emerging markets due to a lack of dark pools, but off-market crosses need to be super sized. The group shared that brokers sometimes get more access to local liquidity, and that for a long time, there weren’t many international holders to buy off. Consequently, members are keen to speak to a wide range of brokers.

With regard to depositary receipts, members with large emerging market funds are looking at exposure via other avenues. Merrill were recommended here as they have been found to be high-touch positive, and offer creation and redemption on ADRs. Members are also keen to connect with Tradeweb on this topic.

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