Under MIFID2, executing traders will be accountable for every aspect of a client order and for ensuring that a firm’s best execution policies are implemented. Ultimately, this means demonstrating the ability to record a consistent, compliance-approved process of why each decision was made.
OTAS helps traders achieve this via a simple 2-step process using the Trade Schedule and Intraday Lingo applications. Traders can copy, store and send the analysis from both apps to satisfy the desk, compliance and clients.

In our previous Function of the Week, we demonstrated how traders can optimize an entire order pad and distribute high and low touch orders based on exceptional trading characteristics and workflow scenarios. This week we concentrate on the individual orders that comprise an order pad, focusing on the initial stage of the execution process,  Strategy selection and Implementation.

The Trade Schedule component offers traders proprietary pre-trade order analysis using quantitative forecasts of stock risk(volatility), impact cost and total expected trade costs for their order size across a range of benchmark strategies. This includes our own Optimal schedule and provides justifiable decision making evidence for strategy selection and best execution processes. Each order schedule can be optionally tailored to an individual clients needs by presenting revised cost calculations based on the clients level of risk aversion.

Once a strategy is selected and implemented it is then dynamically monitored in real-time, continually calculating suggested participation rates to account for changing market conditions and execution fill data throughout the life of the trade.

Key Benefits of OTAS Trade Schedule:

  • Demonstrating ‘best possible results’ on an on-going, consistent, systematic basis.
  • Variable cost output forecasts based on individual client risk appetite/trading style.
  • Justification of pricing decisions for OTC risk trades.
  • Dynamic in-trade monitoring of schedule suitability(decision support for adjusting participation)
  • Multi stage analysis of order execution process

Example: Schedule forecasts to Buy 200k Siemens

A large majority of our EMS partners now have the OTAS Schedule component along with risk, impact and total cost forecast columns directly embedded into their trading platforms, meaning their clients are already benefiting from fully integrated, optimizable execution processes.

Example : Blotter view optimized by ‘riskiest’ orders

Trade Schedule analysis is just one of a suite of bespoke real-time trading applications we have created to help Global Trading desks provide a systematic approach and facilitate ‘sufficient steps’ under the guidelines and framework of MIFID II.

Contact us now to explore the current apps available within your EMS and how we can assist your current execution policy or technology mandate at otassales@otastech.com

The OTAS Intraday Screener app offers a fully configurable heatmap tool providing traders ‘at a glance‘ direction of where outliers sit on the pad, allowing them to immediately focus their attention on where it is most needed.
Embedded within a trading EMS it provides a recognizable systematic approach to order pad optimization, where each scenario analysis a trader wishes to perform is monitored in real-time, highlighting actionable opportunities and exceptions from the norm.

Each axis and chart annotation can be user-configured to suit distinct trading workflows, such as…..

Irregular Price & Volume Order Optimization

Screen an order pad for ‘action’ stocks where asymmetric behaviour in daily price performance and traded volume presents exception outliers for manual trader intervention.

  • Manage ‘high touch’ flow broken out by idiosyncratic daily share price performance from the open(x-axis)
  • Combine with disproportionate volume(y-axis) conditions to focus on highly liquid or harder to trade orders, vis-á-vis passive/aggressive strategy decision
  • Example Screenshot: Standard Life, Informa & St James Place all under-performing on well above average volume with WPP significantly outperforming.

In-Trade Liquidity Screening:

Optimise High Touch vs Low Touch flow, spread crossing and liquidity opportunities

  • Minute by minute lit market liquidity profiling relative to historic normalised ranges(x-axis.) Identify orders with above average liquidity and live trading opportunities Example: Shire, Diageo & Worldpay or conversely adjust to low liquidity trading indicators.
  • Current indicative price spread levels(y-axis) relative to normal. Exceptionally wide spread = execution cost impact from spread crossing, plus low liquidity  Example: Convatec.


Adjusting to Price Momentum changes:

Identify idiosyncratic returns from normal expected ranges.
Actively manage flow and adjust aggression based on rolling absolute and basket relative returns.

  • Highlight orders with abnormal positive or negative price behaviour from the market open(y-axis) and combine with short term momentum compared to peers(x-axis.) Also assess traded volume for trend analysis and intraday mean reversion potential.
  • Examples: Sainsburys Extreme basket relative under-performance over last hour on lower than normal volume = potential Mean Reversion 
  • Capita – Significantly low absolute return from open, excessively high trade volume, negative one hour basket relative return = probable Trend Continuation 
  • Schroders & Merlin– Unusually low absolute return from open, excessively high trade volume, strong positive one hour relative performance = potential Trend Reversal or Continuation

Intraday Screener is just one of a suite of bespoke real-time trading applications we have created to help Global Trading desks provide a systematic approach and facilitate ‘sufficient steps’ under the guidlines and framework of MIFID II.

Contact us now to explore the current apps available within your EMS and how we can help your current technology mandate at otassales@otastech.com

Often traders are asked to provide ‘colour’ or identify reasons why stocks are behaving idiosyncratically during a trading session and what the possible catalysts are. Newsflow is clearly one of the key elements behind daily performance but that doesn’t always offer a full quantifiable picture of intra-day flows or other potential investor sentiment driven reasons.

The combined analysis provided by OTAS Alerts, Microstructure and Core Summary offer users much more granularity and content than just simple commentary of corporate news headlines, as is demonstrated in Vodafone Group today.

The Alerts Overlay function on the Return chart above provides a sequenced timeline of events and abnormal behaviour in a stock’s microstructure.
Significantly for Vodafone, two exceptionally low Return alerts fired in red this morning highlighting large under-performance on both an absolute(R) and basket relative(B) basis. Our model indicates Vodafone shares do not typically encounter moves like this intraday and are highly irregular. Statistical outliers in performance such as these can be used to trade more effectively by identifying potential areas of support or inflection.

The most likely reason for the underperformance can be explained by the other alert flag on the return chart. At 8.07am an exceptionally large Dark/Offbook trade printed in 10.55m shares, it was OTC printed through BATS/CHI-X Offbook reporting exchange. The subsequent absolute and basket relative share price performance gives a simple indication on the direction of the trade and the impact of the risk unwind.

The clues to the motivation behind the trade may well lie in the Core Summary detail. For example, this will quickly inform users of the most recent newsflow and any upcoming Events. Vodafone provides a Sales Release in 2 days

 

 

 

 

The Liquidity tab embedded within our real-time Microstructure application provides traders with a range of key volume forecasts for the current trading session including estimates on important high ‘natural’ liquidity events like the closing auction. The forecasts update dynamically with reference to historic volume and current live market conditions and provide:-

  • Pre-trade volume fragmentation analysis for modelling P.O.V and VWAP strategies
  • Closing auction volume estimates for risk unwind to avoid carrying unwanted positions overnight
  • Assessing liquidity, impact and feasibility of Market on Close orders.

The current Day Total forecast volume can be immediately compared to the recent 30 day historic mean average in the Microstructure charts and accompanying legend to establish whether the stock is expected to trade heavy or light relative to normal.


Traders using the OTAS Schedule component are also offered forecast participation rates over a range of short term trading periods in view of completing an order ahead of its optimal schedule. The key benefits here are:-

  • Provides statistical evidence of potential impact on ‘must be completed’ order execution instructions.
  • Allows traders to visualise the best strategy approach and evaluate participation rate from the time the order is received.
  • Calculates your total order size as a percentage of remaining forecast volume still to trade on the day.

After a strong showing in H2 2016, Swatch shares are currently displaying a number of potentially negative fundamental, technical and sentiment risk indicator observables in OTAS.
With the crucial festive period over and the next financial update not until the 16th March, such warning signals may provide Swatch investors with early evidence to re-position in the shares…..

  • Price Momentum fading – Having made back all its sector underperformance since early August 2016, Swatch’ relative performance is showing signs of fading again over the last week. Selling pressure is also evident in todays session, the OTAS Microstructure(right-hand chart) indicates the shares underperforming their basket on significantly higher than expected volume.
  • Analyst EPS expectations continue to diverge from market price – Having shown a positive correlation historically, the OTAS EPS/Price chart shows a clear dislocation in EPS momentum and price. The shares currently trade at a 14% premium to the mean analyst price target in spite of ongoing negative earnings revisions.
  • Only Insider selling – A number of transactions lately show company insiders selling into the rising share price. Timing wise, recent historical trades indicate well informed trading.
  • Trading on peak valuation – Swatch shares have looked statistically expensive(2 Stan.Dev event) relative to sector peers since November, moreover, on 21x 12m Fwd P/E the shares are trading around their highest ever absolute P/E multiple. Similar comparable valuation extremes back in July 2007 subsequently saw the shares re-rate heavily and lose around -65% of their market value.
  • High Implied Volatility – Vol markets indicate higher sector relative risk for Swatch shares compared to peers, a +/-14 move over the next 3 months. Recent option trading activity shows a larger bias for Puts.
  • Short Interest – Low activity from Hedge Funds. Current free float on loan stands at around 12%(which is within the normal expected range compared to the last 2 years) and has contracted by around 1.1% in the last week.
  • TIM Indicator – Contrary to the above observations, sell side brokers are generally positive on Swatch shares and are pushing them accordingly. The TIM indicator has seen its score* improve from 2 > 8 in the last week indicating bullish sentiment. Perhaps they don’t have OTAS as their evidence based early warning system !??
    *1=Heavily Bearish(Underperform) – 10=Heavily Bullish(Outperform)

In the latest release of the OTAS Microstructure and Alerts components we have focused on providing a number of key trading analyses implicit in a traders decision making process when assessing strategy implementation, directing working order flow and sourcing liquidity.
The combination of these additional elements further establish towards demonstrative best execution obligations for clients whilst providing a recognised structure of compliant procedures.

  • Venue Analysis & Volume at Price – Live exchange volume fragmentation analysis for lit and dark markets including (bid/ask)trade weight intensity, providing supporting evidence for venue selection.
    New volume weighted price graph identifying key levels of trade concentration including venue breakdown.

vb

  • Block OTC/Dark Pool Volume Alerts – Realtime monitor of outsized traded volume providing alerts for sourcing liquidity opportunities. Calculated on individual stock specific thresholds, the sensitivity of the alerts can be configured to capture genuinely unexpected irregular volume in the stocks you care in.

to

  • Alerts Overlay on Microstructure – Opt to see all statistically relevant trading signals overlaid on the microstructure charts to identify intraday impact points. Benefits include, understanding key share price drivers as part of a pre-trade screening process or as a detailed audit trail of why particular trading decisions were made.

to1

All of the new functionality can be configured and personalised to a clients own specific preference via the settings icon. Simply choose the analysis relevant to your workflow.

For more details or further questions on any of the new analysis contact otassales@otastech.com or to find out more about OTAS Technolgies website here

 

Let’s quickly dismiss the view that investors learnt from Brexit how to react to the election of Trump. US options are the world’s most liquid and the three month market that we track has consistently shown that President-elect Trump would be a sanguine outcome for stocks. Commentators are falling over themselves after the event to explain why this is, but OTAS has portrayed a consistent message of financial calm.

US Large Cap. Implied Volatility

US Large Cap. Implied Volatility

There have been three notable spikes in implied volatility over the past 16 months. Two of those, which we have labelled China and Recession, took this measure to exceptional levels, as fears mounted that a slowdown in Asia would cause the world economy to crater. The third spike, in the aftermath of the vote for Brexit, saw risk rise to unusual, but not exceptional levels. Politics may have rediscovered Paul Graham’s mantra that “It’s charisma, stupid” to explain which candidate wins a two-horse race, but the market remains firmly fixated on the economy.

By now we all have the received wisdom that Trump is good for certain regulated industries, such as banks and pharmaceuticals and his fiscal policies will mean more inflation and higher interest rates. The perceived riskiness of utilities relative to financials has jumped to unusual levels, last seen just before everyone remembered that Greece was about to default. With a while to wait to find out what Trump really stands for, big banks could be less risky than energy distributors for a while.

Implied Volatilty of Utilities Relative to Diversified Financials

Implied Volatilty of Utilities Relative to Diversified Financials

Central banks may have come to realise that forever easier money does not generate growth, but now they have the perfect foil to allow them to reverse course. Governors around the world have been beseeching politicians to do more to generate growth and the public has responded by electing those who promise to do something rather than nothing. There are incumbents who need to wise up fast. If Renzi’s reform bid fails then he may be gone, and if it succeeds and leads to a German imposed bail-in of bank depositors, then he’ll likely be gone a little later. The French also have an activist alternative to hamstrung mainstream politicians. Keep track daily of the implied volatility of the relevant markets and sectors with OTAS.

The chart of PE for the US top stocks suggests that the post-election move has room to run further and it would take a 7% re-rating to lift the valuation back to the highs of May 2015, when forward PE was last in touching distance of exceptional levels.

US Lage Cap. PE Valuation

US Large Cap. PE Valuation

One piece of received wisdom that is not playing out is that Trump will be unreservedly bad for trade and hence China and Emerging Markets. Mexico has taken a kicking, but perceived risk among China Enterprise stocks is almost unchanged. Once again it is fears of economic slowdown that floats this boat and clearly investors are not worried about a slowdown at present. Perhaps they believe that China wins relative to Mexico.

China Enterpise Implied Volatility

China Enterpise Implied Volatility

UK media is fretful the economy will suffer from trade restrictions. It is not obvious why Trump would single out the UK for harsh treatment when everything he has said points the other way and the immediate stock market weakness is likely to be currency related. The financial community in the UK is too savvy to confuse its own post-Brexit well-being with the health of the economy, when the opposite may be true. Keep an eye on implied volatility in the UK and be prepared to buy when threshold levels are reached. Threshold low PE ratios are also approaching.

One more thought going back to our blog of October 17, in which we argued that insurance stocks would be back in business once interest rate rises were on the cards. It may take a while for recalcitrant European central banks to get it, but the valuation of US insurance stocks in the last couple of days reinforces the conclusions we drew about what happens when they do.

US Insurance Sector PE Valuation

US Insurance Sector PE Valuation

After years of impasse, when the conclusion of culture wars rather than the economy occupied politicians, there are signs that activism is bringing markets to life. People worry that cultural change will be reversed, but let us hope that politicians and central bankers focus on the most important task of restoring growth for the benefit of all.

The OTAS Microstructure stack offers a range of charts which breakdown the intraday characteristics of stock trading, allowing you to visualise potential inflection points and changes in trend which may ultimately affect price behaviour and return. Whilst our Alerts immediately inform you of any extreme outliers across metrics such as return(vs basket,) liquidity and spread our volume analysis provides users granular insight into trade weight and direction bias making it easy to identify subtle changes in order flows.

Two charts which demonstrate this quite succinctly are the Volume(Realised –Mean) and Traded Volume Shares.

cht

In the example above we can see that from the market open today’s realised traded volume(Chart 2) is significantly ahead of what is typically expected and remains high for the next few hours. To establish who the aggressors were over this time period we can refer to the traded volume shares(Chart 1.)
Here it is observed that sellers were in the ascendancy as the bid volume(blue line) is markedly higher than the offer(pink line) indicating a keenness by them to cross the spread and hit bids.

As the traded volume begins to normalise the directional tilt converges as bid volume slows and offer volume picks up suggesting that the sellers are slowing participation(or coming to the end of their order) and that buyers are increasing their aggression. This could represent a support level for the shares and/or a potential inflection point.

Interpretation of changing volume trend behaviour allows traders to assess the potential impact on price and react accordingly.

One of the most highly valued and frequently used measures by our clients within the OTAS suite is the Insider Transactions analysis. Delivered through multiple OTAS applications, users can assess the potential impact on a share by a single well timed trade, placed by a company director or major shareholder.

Live Insider Transactions via the Alerts feed
The introduction of live Insider trade notifications in our Alerts app allows users to view transactions for an order-pad, portfolio or watchlist as they happen in real-time, meaning they need never miss a potentially significant price sensitive trade. Proof of this was evidenced in the trading session immediately after the BREXIT vote when we noted an unprecedented number of senior management in UK Top 100 companies buying their own stock. 

The Insider alerts feed can be custom filtered to identify just significant discretionary transactions or include all trade types, such as exercise of employee stock options and share awards. Our star rating attached to each insider immediately reveals the prescience of the transactor.

        Live Alerts App.                                                  Alert Customisation Filter
alerts

Insider Transactions in the Core Summary
Once a new Insider transaction is received from our provider, it will display in the Alerts panel(as above) and will be available in the Core Summary detail table the following minute.  The Insiders Stamp will populate with new Buy/Sell flags shortly after and will be visible for the next month.

cs2

Insider transactions get registered on the accompanying chart and can be filtered to show Priority discretionary transactions or All trade types just like the live Alerts panel. We keep a history of every trade going back as far as 2006, these can be viewed by clicking the ‘Max’ zoom button. To single out an individuals previous trading history over the selected time-frame….simply click on their name and the chart will filter accordingly.

The plight of insurance companies in an era of low interest rates has led some to predict the total collapse of the industry. The sector is a bellwether for the stock market, because so much of its profit comes from investment returns. The chart of the PE of European insurers relative to the broader market shows that extreme valuation for the sector is a precursor of major market corrections.

ins-pe

European Insurance Valuation Relative to the Market

On this logic things are fine, because at two thirds of the average PE, insurance stocks have only just crossed into the normal valuation range following a period in the investment doghouse. This would tie in with our recent message that the prevailing investment trends are uncertainty over the direction of interest rates and gradually rising implied volatility back to normal levels. Relative implied volatility for the insurance sector peaks at index lows.

Implied Volatility of Insurance Stocks Relative to the Market

Implied Volatility of Insurance Stocks Relative to the Market

The woes of the insurance industry are easy to identify, which is why the sector is so popular among investment bloggers, who use it to point to the coming Armageddon in Europe, without having to offer too much analysis. Insurers depend on yield, all the more so as their customers age, so if central banks reduce bond yields to zero or below, insurance companies die.

You do not have to talk to those in the industry for too long to hear them bemoaning the new capital that is driving down returns for everyone. For the insurers, this is dumb capital that lacks the long-term perspective of their industry, but which thanks to light or no regulation has a lower cost of capital than incumbents. This is two different arguments; one about time horizons and another about the shadow financial sector.

Insurance is an industry whose last great innovation was the statistical analysis that brought about mortality tables. This allowed probability as a proxy for predictability and gave rise to a legion of highly specialised mathematicians with skills finely tuned to the needs of the industry. The maths can now be done faster and more effectively by computers, and so any cost advantage that new capital has from efficient operations is a permanent one. Whether you are regulated or not, you no longer need all those actuaries, just as investment banks no longer need so many analysts and lawyers don’t require all those proof reading juniors. Regulation actually serves to slow the loss of white collar jobs, because however onerous it may seem, all regulation favours incumbency.

The longer timeframe argument is more intriguing. Factor analysis shows that the inverse correlation between equity values and bond yields has weakened over several decades, most likely due to lower inflation, which had globalisation as its primary cause. The relationship has actually inverted since 2008, so that bonds and equities rise and fall in sync. Initial observations since 2013 suggest that the traditional correlation is reasserting itself.

This is due to the end of quantitative easing in the US and the political reaction to globalisation across the western world. Rising protectionism and constraints on immigration are the most evident backlash. These measures are designed to push up local wages and hence will be inflationary, and could herald the reversal of a long period of ascendancy of capital over labour.

It should be stressed that the jury is out on this. Most of our blogs reference the standoff between those who believe in the continuation of easy money and those thinking its time has passed, because this is the largest investment argument to be resolved. It is also one that OTAS indicators are ideally placed to track, including our fear gauge and low volatility performance monitor.

If the worm has turned however, and the ineffectiveness of monetary policy at the zero bound combines with political pressure to trigger policies that lead to higher interest rates, then the insurance sector will be back in business. Returns on insurance equities should discount this long before it happens. Those cautious mathematicians who have survived in the sector will have won the argument about the long-term, because underwriting in the industry should be priced using a higher cost-of-capital.