Apidays Singapore 2024 - Modernizing Securities Finance by Madhu Subbu

Modernizing Securities Finance: The cloud-native prime brokerage platform transforming capital markets.
Madhu Subbu, Managing Director, Head of Securities Finance Engineering

Apidays Singapore 2024: Connecting Customers, Business and Technology (April 17 & 18, 2024)

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Transcript

1. Modernizing Securities Finance The cloud-native prime brokerage platform transforming capital markets. March 2024
3. Agenda • Securities Finance Market Overview • Technology’s role in Market Efficiency • A Brief History of Automation in Equities Trading • Clear Street’s Public APIs and the road ahead • Q&A
4. 3 Improving Access to Capital Markets Madhu Subbu Managing Director, Head of Securities Finance Engineering - CEO, Enigmatch - Engineering Lead - Investigations at Chainalysis - Engineering Lead, Inventory Optimization at Credit Suisse Presenter
5. 4 Securities Lending Market Structure Asset Managers Pension Funds/ Mutual Funds Insurers Sovereign Wealth Funds Central Banks Lenders Supply Direct (Principal) Lenders Agency Lenders (Custodians) Third Party Lending Agents Intermediaries Prime Brokers Pooled Collateral Borrowers Prop Desks Hedge Funds Demand Banks Inventory Collateral Equilend Retail Brokers
6. 5 Market Utilization Source: Int’l Securities Lending Association Aggregate data for Q1-Q4 2019 US Equities Total Lendable : $9248 Bn On Loan: $458 Bn (4.95%) EMEA Equities Total Lendable : $2500 Bn On Loan: $193 Bn (7.72%) APAC Equities Total Lendable : $1825 Bn On Loan: $195 Bn (10.68%) Utilization is low, because • Fragmented liquidity • Information asymmetry • High search costs
7. 6 Brief history of Equities Trading Equities Trading has come a long way since the introduction of Instinet, the first Electronic Communication Network (ECN) in 1969 The Cash Equities Market went through 6 distinct levels of automation • Level 0: Human Interaction • Level 1: Electronic Distribution of Market Data • Level 2: Electronic Order Management • Level 3: Electronic Order Matching • Level 4: Algorithmic Decision Making • Level 5: High Frequency Trading
8. 7 Level 0: Human Interaction • Humans traders negotiate directly in person on the terms of a trade • In Stock Exchanges, this took the form of Open Outcry — a system of verbal and hand signals to communicate a bid or an offer Open Outcry at the NYSE
9. 8 Level 1: Electronic Distribution of Market Data A later model of Quotron • Market data is distributed via an electronic medium to places far away from the venue of trading • In 1960, Quotron became the first company to deliver stock quotes on an electronic screen
10. 9 Level 2: Electronic Order Management • Orders are captured and communicated electronically • In 1971, the National Association of Securities Dealers Automated Quotation (NASDAQ) system was established • NASDAQ had no physical trading floor - Market participants placed buy/sell orders on computers communicating with each other Bunker-Ramo’s NASDAQ Data Center in Connecticut, 1970's
11. 10 Level 3: Electronic Order Matching • Bids and Offers are matched automatically using an algorithm • With electronic matching came tremendous scale • The Central Limit Order Book (CLOB), proposed by the SEC in 2000, matches the highest bid and the lowest offer on a ‘’price-time priority” basis • The CLOB remains the most popular mechanism used by exchanges today* An electronic Order Book for Bitcoin *Variations of this algorithm exist: https://www.cmegroup.com/confluence/display/EPICSANDBOX/Supported+Matching+Algorithms
12. 11 Level 4: Algorithmic Decision Making • Trading decisions (what to buy or sell, how much, and when) are generated automatically by an algorithm • Credit Suisse’s Advanced Execution Services division was an early pioneer in this field — introducing Guerilla and Sniper trading algorithms in 2004 Credit Suisse Headquarters in Zurich
13. 12 Level 5: High Frequency Trading • By the 2010’s, order execution had become so reliable and market connectivity had become so fast, that trading algorithms were able to route orders to exchanges and back in a few milliseconds. High Frequency Trading accounted for more than half of the trading volume by 2013. • With HFTs came tremendous liquidity,  but also opportunities to manipulate the market by front-running orders to the exchange • IEX*, an upstart exchange, tried to level the playing field by adding a “Speed Bump” — a physical box with 38 miles of fiber coil that slows down all orders by up to 350 ms. IEX “Speed Bump” box *IEX was the subject of the 2015 book Flash Boys by Michael Lewis: https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393351599
14. 13 Clean Abstractions and Product Standardization leads to Market Automation % Traded in a Centralized Venue with Electronic Order Matching • Generally, the more standardized/fungible an instrument, higher the level of automation for that market • For orders to be matched electronically using a Central Limit Order Book, a product needs to be standardized to the extent that the only inputs to the matching algorithm are price and quantity.
15. 14 Product Complexity vs. Automation • Electronic Order Matching (CLOB) • Variables: 2 (price,qty) • High Information, Transparent • Centralized Trading Venues • Efficient Price Discovery • Large Liquidity Pools • Narrow Spreads • Human Workflow (RFQ) • Variables: many • Information Asymmetry/Opaque • Decentralized, Bilateral Trading • No convergence on price • Fragmented Liquidity Pools • Wide/Unobservable Spreads Cash Equity Equity Futures FX Spot Complex, Bespoke Equity Options FX Options UST Equity Swaps Stock Loan Standardized IRS Standardized Swaps CDS Simple, Standardized Corp. Debt
16. 15 Clear Street’s Public APIs for Securities Finance Clear Street is on a journey to modernize our financial infrastructure https://docs.clearstreet.io
17. Thank You 4 World Trade Center 150 Greenwich St. Floor 45 New York, NY 10007 (646) 845-0036 clearstreet.io Clear Street does not provide investment, legal, regulatory, tax, or compliance advice. Consult professionals in these fields to address your specific circumstances. These materials are: (i) solely an overview of Clear Street’s products and services; (ii) provided for informational purposes only; and (iii) subject to change without notice or obligation to replace any information contained therein. Products and services are offered by Clear Street LLC as a Broker Dealer member FINRA and SIPC and a Futures Commission Merchant registered with the CFTC and member of NFA. Additional information about Clear Street is available on FINRA BrokerCheck, including its Customer Relationship Summary and NFA BASIC | NFA (futures.org). Copyright © 2024 Clear Street LLC. All rights reserved. Clear Street and the Shield Logo are Registered Trademarks of Clear Street LLC.