Outsourcing is all the rage these days. Whether a bank or broker, firms both in the U.S. and now increasingly in Europe, are faced with meeting more compliance and best execution mandates. Enter Itarle, a firm which provides algo and analytics tools for tier-one banks in Europe, Asia and the US for equity and futures markets.
With a lot of the European best execution mandates expected to have similar versions enacted in the US, it’s going to be imperative that banks bulk up their algo tools. This is where vendor Itarle and its CEO and founder, Paul Lynch, are looking to break out. Lynch told Traders Magazine that banks will have to outsource more and more of their algo technology needs – stop trying to build internally – and leverage the expertise of a firm like his.
Traders Magazine recently caught up with Paul Lynch, CEO & Founder of Itarle and discussed changes in algorithms, the best execution mandate the market must meet and analytics issues the market is facing.
What are the most notable changes to best execution regulations in recent years and how do you see them evolving in the years ahead?
Paul Lynch: Algorithmic trading has been in the spotlight since MiFID II, even outside of Europe. One reason is that, under MiFID II’s RTS 28, parties cannot identify who actually executes a trade. To provide greater transparency, there should be a legal obligation to disclose but right now, RTS 28 requires banks only to disclose the top five venues where they trade; it doesn’t tie them to regular counterparties such as HFTs and PTFs. In five years, firms will have to execute under their own name, or at least disclose who the actual executing counterparty is.
With that in mind, they need to remember that bypassing the lit book to avoid exchange fees does not always provide the best results and return for their clients.
What are the key differences between the sell-side and buy-side’s approach to algo and best execution trading tools?
Lynch: Over the last few years, as regulatory pressure has increased around trading and data usage, the sell-side has shown an increased appetite for best execution services. Banks are weighing whether it’s in their best interest to build the technology internally or team up with third-party technology vendors like Itarle.
On the other hand, the buy-side has been a bit more reluctant to embrace analytics and best execution technology and a large part of that is due to the relationships they’ve had with their brokers. However, with regulations continuing to increase in Europe and eventually the US around data usage and execution procedures, these are practices that both sides will have to take a very hard look at very soon.
How do you see the adoption of best execution and algo tools progressing?
Lynch: It’s clear that algos and smart-order routing tools drive better execution and reduce price slippage, regardless of asset class. If there’s less friction in the system, the trading decision process and choice of algos becomes more important and improved execution performance will always outweigh any amortized cost of a third-party vendor for large banks. As the prospect of banks trading under their own name increases, the value of efficient execution will follow suit, as will the benefits accruing from the use of outsourced algos and other best execution tools. It is also important that banks and brokers have the ability to add additional alphas to best ex algos so that a ‘house view’ can be incorporated as part of the service. This reduces commoditization and ensures healthy competition, leading to better execution for the buy-side.
How is Itarle addressing algorithmic and analytics issues facing the industry?
Lynch: By continually refining our solutions, we enable banks to deliver optimal order execution for their buy-side clients. We only sell our products to banks and brokers so we have no proprietary trading operation, aligning our interests solely with those of our clients.
Our solutions are customisable and can be easily and seamlessly integrated within banks’ existing systems. The Itarle coverage includes all major equity, fixed income, FX and futures and options exchanges as well as trading venues, including complex and multi-leg strategies across multiple platforms. This approach enables sell-side institutions to have a consistent approach to best execution across assets classes leading to greater transparency to the buy-side and regulators.