?Mapping Out the Plan

?Neill Penney, co-head of trading at Thomson Reuters, talks to Galen Stops about the recent changes in the firm’s FX business and details how it plans to continue developing it in 2017.

There were some significant changes to Thomson Reuters’ FX business in 2016, with one of the most visible being the departure of Phil Weisberg in November, who had headed the FX business at the firm since 2012.

With Weisberg leaving “to pursue opportunities outside the firm”, Thomson Reuters has re-structured its management, introducing a new business unit called Trading.

As the co-heads of the Trading business, Michael Chin and Neill Penney will be responsible for overseeing the firm’s FX, rates, credit, equities and exchange-traded instruments businesses across the full lifecycle of these products.

Initially, each of the co-heads will focus on their own areas of domain knowledge, with Chin looking after the equities side of the business, including the Eikon desktop and the market data business, and Penney covering the transaction side of the business, which includes Thomson Reuters’ FX platforms.

Eventually though, the plan is for the responsibilities of each co-head to broaden out so that they both end up overseeing the entire Trading business together. Explaining the logic behind this new structure, Penney says: “Our clients increasingly want to talk to us in a cross-asset way.”

For some, the talk of a “cross-asset” solution in financial services brings to mind the idea of a cross-asset execution management system (EMS), but this is not what Penney is referring to in this instance.

Instead, he says that the demand is currently for one source that can provide all of the support around trading in multiple asset classes. Giving an example, Penney comments: “If you look at transaction cost analysis (TCA) or market data provision, increasingly clients want to have one vendor, one procurement process and one standardised way of accessing what they need.

“This may be because a firm needs to trade three asset classes simultaneously or it could be as dull as them being frustrated by TCA analytics that are different between different asset classes or market data standards that are not consistent between asset classes. So the more they can use one vendor in a standardised way for their multi-asset needs the better.”   

Consolidated Offering

Consequently, Penney says to expect further areas of unification within the trading business lines. One area where this could occur is within its buy side focused offering.

In September, Thomson Reuters announced a deal to buy Redi, an EMS designed to provide cross-asset class trading capabilities to the buy side, while it already owns FXall and a majority stake in Tradeweb, a dealer-to-client fixed income platform.

Although light on the specifics, Penney says that there is a clear direction of travel for the development of these products, which is determined in response to customers that increasingly view their trading as involving multiple assets that they happen to trade rather than as different product areas.

“What we want to do is, as our clients consume these different capabilities from us, start packaging them up in ways that are easier for them to digest. Initially, that could involve something as simple as aligning commercials. It may be about having a single sign on, it might be about actually having tools in the same container or it might be about having two different tools in Eikon be consistent between equities and fixed income,” says Penney.

The desire to unify some of its various offerings is reflected in Thomson Reuters’ decision at the end of 2015 to consolidate access to all of its different FX trading venues into a single desktop, called FX Trading (FXT).

Using FXT, its clients can access request for stream services via FXall QuickTrade, continuous streaming prices via Bank Stream, central limit order books via Matching and Order Book and a conversational dealing platform via Dealing through one single point of access.

One year on and Thomson Reuters is over the 75% point in terms of the number of sites migrated to FXT, with the new software and hardware infrastructure having been implemented at over 3,000 sites.

Cost and Risk Concerns

Overall, Penney is keen to emphasise two main client concerns that he believes the FXT migration addresses.

“It’s very easy to talk about innovation, but for many of our customers the big themes are risk management and control and cost management and control. The FXT migration speaks to both, reducing our customers’ costs by taking out custom hardware from their site, but then also having a container to put innovative new capabilities in much more easily than we could in the Dealing and Matching days,” he says.

Delving slightly further into each of these themes, Penney claims that the FX industry is currently going through a very risk averse period, where for many clients the core objective is to minimise the necessary operational and conduct risk that they run in their businesses. He says that Thomson Reuters has responded to this in a number of ways, not all of which involve FXT.

For starters, he highlights that Thomson Reuters has been involved in the many committees that are assisting in the writing of the Global Code of Conduct, of which the second part is anticipated next year, and plans to shape some of its product offerings based on the discussions in these committees.

Penney also points to the rulebook that Thomson Reuters introduced this year for all of its trading venues, which he says was designed to “tighten up how we’re running our venues and then formally explain this to our clients, as well as outlining the conduct that we’re expecting from them”.

Other examples of improved risk management and controls cited by Penney include the new high/low methodology introduced into the Matching platform, which indicates the lowest and highest prices available for a good amount during the trading day to make it easier for banks to manage their stop-loss orders in volatile markets, and the work that it is doing to try and make the implementation of Mifid II requirements as easy as possible for its clients.

With regards to Mifid II, Penney says that one of the main challenges for FX trading firms is simply the logistical hurdle of having to onboard to a multilateral trading facility (MTF), while TCA solutions are also in higher demand because of this regulation.

Another element of risk reduction, which Penney concedes is somewhat vague as a concept but nonetheless maintains is very important, is simply improving product and service quality.

“For both buy and sell side operations the problems associated with software, of which there are always some, are becoming increasingly inconvenient in terms of the level of diligence and control that they’re expected to maintain.

“So a lot of the work that we’re doing is actually below the water line, just improving the level of operational robustness, making sure that systems have extra tests before they go out of the door, etc,” he says.

In terms of cost management, Penney points to the latency floor that was introduced to the Matching platform in April 2016, arguing that Thomson Reuters clients don’t want to be caught in an arms race where they are constantly forced to spend more and more on their technology budgets in order to keep increase their trading speeds. He claims that the latency floor represents a “fast enough is good enough” approach and therefore limits the amount that firms need to spend on low latency trading technology.

Looking at the buy side, Penney says that the introduction of Multi-Bank Batch on FXall as something that helps firms manage costs. Multi-Bank Batch enables firms to trade electronically whilst also automatically ensuring that they trade consistently with their corporate mandate for FX execution.

It allows the user to execute a number of trades simultaneously, with each one going to the bank specified for that particular trade size and currency pair under the corporate mandate and automatically chooses the best price available, whilst also providing an audit trail.

“At the end of this process, not only have they got the best price, but there’s no risk of them selecting the wrong bank because the system has chosen for them based on the rules they put in place. Which means that their audit trail ties up with their corporate mandate and can deal 90% of the trades they have to do on any given day in one stroke,” says Penney.

Data Driven

In addition to focusing on risk and cost controls and the continued migration to FXT, a key item on the agenda for Thomson Reuters next year is innovating in new product areas, such as its market data business.

“The market’s need for data and the desire to have more accurate data continues to grow,” says Penney. “Increasingly it’s not enough to just do a good job, you have to be able to quantitatively establish that you’re doing a good job.”

Subsequently, Thomson Reuters is planning a few changes to its market data offering. Firstly, it is introducing a binary market data feed for Matching, cutting the latency of the feed down to 25 milliseconds. The second is that the firm plans to introduce a new FX composite indicative rate.

“We have over 1,000 price sources that help provide indicative FX quotes into Thomson Reuters and we have about $350 billion per day of transaction flow. The challenge is then to construct a next-generation composite rate that reflects, as best we can given the data, where the market is.

“That feeds into TCA and although people always think of this in terms of where EUR/USD is, many of our clients will have factories in Asian countries where there is less liquidity and they’ll need a robust indicative rate for a broken-dated NDF. So it’s a very broad problem that we’re trying to attack here,” says Penney.

It’s been well documented that a group of FX market participants are trying to launch a consolidated tape for FX, similar to what exists in the equities market. Although in theory this could de-value some elements of Thomson Reuters’ market data, Penney argues that in reality this is not the case.

“The thing that’s special about Thomson Reuters Matching is it’s a regulated all-to-all venue, so all the prices that are available are hittable by any client, there’s no last look and there’s a rulebook that governs behaviour on the platform. In addition to all this, we have several people internally tasked with monitoring and surveying the market and following up on any breakages from the rulebook.

“That means that the data coming from Matching is incredibly high quality and that’s why, for instance, people are happy to use it as a reference when a stop-loss is executed in a busy market when the market moves. It’s a trusted reference.

“I don’t think that you can create that simply by assembling a tape where a range of different sources of market data are input and blended together. And particularly when it comes to last look liquidity or liquidity that is only available to certain market participants, it’s not clear what such a composite would represent. I think that Matching has a much higher standard and that’s the value that people are willing to pay for,” he says.

Thomson Reuters’ focus on TCA in the future was evidenced by the deal, announced in early December, that the firm was partnering with BestX to offer its clients independent TCA tools. As part of the deal Thomson Reuters will also take a minority equity stake in BestX and have a representative on the BestX board.

A big part of the drive for TCA tools in FX is the Mifid II best execution rules, which imposes a formal responsibility on firms that trade on behalf of clients to report on how they manage and make their execution decisions. This is also why Penney predicts that the use of algo trading amongst buy side firms will continue growing next year.

“Within the buy side we see big growth in algos and TCA, these are both products that we’ve been working on for a while and I think that you’ll see a big step up in terms of the level of attention that we give them in 2017. Algos hold the promise of allowing customers to execute large size FX transactions with what is almost a built-in proof of best execution, because the system is following an algo which the trading firm can ensure at the outset matches its trading strategy and then every single fill is documented as being compliant with that,” he comments.

Sale Speculation

Discussing the future of Thomson Reuters’ FX strategy, it’s impossible not to address the rumours that have surfaced lately, suggesting that the firm might be putting its Tradeweb and FXall businesses up for sale.

To be fair, it’s worth pointing out that Thomson Reuters is hardly the only FX platform provider that is generating speculation about a potential sale at the moment. The rumour- mill is seemingly in full swing right now, with the number of platforms speculated to be for sale almost certainly outnumbering the number of credible buyers for these platforms.

One factor that could be generating the speculation is the departure of Weisberg, which was swiftly followed by news of other senior departures at Thomson Reuters.

These included the departures of Tom San Pietro, head of product management for FXall; Jack Linker, head of liquidity sales, transactions, for the Americas; and John Richards, senior director, liquidity sales, Americas.

In addition, Richard Williams, head of sales for North Asia and Japan; Elmer Chiu, sales in Singapore, Sydney-based Simone Halpin, director, FXall, and Amy Goh, head of financial designs, transactions, Asia, also left firm, according to market sources.

Although these departures were part of a broader set of 2,000 cuts announced by Thomson Reuters, it’s not hard to see how such senior departures could fuel speculation about the future of its FX business.

However, Thomson Reuters has emphatically denied that it is considering a sale, stating that it “remains fully committed to its FX business, including electronic trading platform FXall, as well as its investment in fixed income venue Tradeweb”.

The statement adds: “Thomson Reuters trading businesses are a fundamental part of our value to financial markets and something we will continue to evolve and invest in, as evidenced by our recent agreement to acquire Redi.”

Penney is certainly very bullish regarding the Thomson Reuters FX business going forward, noting that buy side activity in terms of both trading volumes and the number of firms using the FXall platform continue to grow.

Meanwhile, he sees more optimism on the bank side following what has been a difficult few years for these firms as they struggled to come to terms with a whole slew of new regulatory requirements.

In addition to this, Penney highlights that the Thomson Reuters business is more diversified than ever, meaning that the firm is to a degree insulated from downturns in the market.

“We’re a very diversified business. We have transactions, which is volume driven, we have the trading desktop, which is driven by the people using it, and we have the market data and enterprise businesses, which are driven by the products themselves.”

In a highly competitive landscape, FX vendors and platforms need to continuously evolve in order to continue building their businesses. With all the changes that Thomson Reuters has made and the ones still planned, 2017 could mark the next stage of the evolution of its FX franchise.

Galen Stops

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