Technology Strategy for the Nigerian Capital Market. Ade Bajomo Executive Director Market Operations and Technology The Nigerian Stock Exchange

Transcription

1 Technology Strategy for the Nigerian Capital Market Ade Bajomo Executive Director Market Operations and Technology The Nigerian Stock Exchange JULY 2013

2 CONTENTS 1 Introduction Why Change? 2 Industry Trends 3 Technologies for Capital Market s Emergence 4 Putting It Together - The Technology Architecture 5 Impact on Market Participants 6 Conclusion

3 Why Change? 1. The current trading platform has reached its end of life and will no longer be supported by its suppliers from mid It has been in use at the NSE since Opportunities for automation (straight through processing) will be lost, leading to poor level of price transparency and operational efficiency for both investors and operators as activities outside of trade matching remain largely manual 3. Opportunities to scale the market with more companies, achieve $1T capitalisation and increase the retail investor base, reaching out to the rural areas will not be possible 4. The Nigerian Capital market s aspirations to move from frontier to emerging market status, WFE membership and inclusion in the MSCI Emerging market index, all critical for attracting significant order flows and competing with the leading African (an emerging market) Exchanges, will not be achieved 5. Nigeria s Vision 2020 for the capital market will not be realised and its current position as the leading capital market in West Africa jeopardised in the medium term as other Exchanges such as Ghana continue in their steady technology investments 6. Opportunities to diversify the income base that can be used to grow the Exchange (such as market data) will be lost 7. The Exchange will not have the ability to offer more products (and especially hedging products ) such as Options and Financial Futures, required for a fully functional capital market 8. The uptime and operational viability of the Exchange will be significantly impacted without investments in modern business continuity approaches, with detrimental impact on not just the market but the wider economy Changing the experience of doing business

4 Economic Snapshot Build for the Future Highlights 2013 Est. GDP Growth 7.1% ( %) Inflation trending south at 11.4% ( %) 2013 Est. MPR Rate 12% ( %) Current account surplus at 8.9% of GDP Stable Foreign Exchange $1/N160 Foreign Reserve USD 47.63Bn (2012 USD 44Bn) Improved Credit Rating (Fitch BB-/Stable, S&P B+/Stable ) amidst global sovereign downgrades Estimated 3 rd largest global population by 2050 $1 Trillion Capitalisation Building for the future and to last is not an option but a necessity 7/30/2013 The Nigerian Stock Exchange 4

5 Technology: An Essential Capital Market Enabler Moving with the times The Securities industry is largely driven by technology, whereby the ability to develop a focused strategy for the utilization and deployment of resources is critical. Support for new technology driven trading approaches is key Utilisation of data (including those from the Social Media) to develop automated trading strategies and enhanced risk management is now mainstream Trading venues, regulators and regulated entities need to keep abreast of the trends to make markets more transparent and fairer for investors and participants Speed, accessibility and robustness of technology systems are now critical success factors of modern trading venues, underpinning the achievement of scale economics Key Industry trends include, but are not limited to the following: Mobile / E-trading Co-hosting and Co-Location New technology enabled trading models Reduction in latency and increases in order book capacity Market surveillance technology 18-Junel-2013 The Nigerian Stock Exchange 5

6 Latency MS Industry Trends: The Need for Speed Reducing the time of execution Low latency allows for unnoticeable delays between an input being processed and the corresponding output, providing real time characteristics LATENCY DEVELOPMENT, 2000 to Year Latency s ms ms ms 2010 <900 us <100 us 0 *Source: KPMG - Winning platforms, 2012 Key Trending in Latency reduction Over the past 5 years, most execution venues have made substantial investment in creating trading infrastructures and platforms that reduce latency, support high volume flow, and disseminate market data. Key theme to consider: Speed and Connectivity How does your speed of access and level of connectivity compare to your main competitors? Do you understand the commercial implications of not updating legacy IT systems? 18-Junel-2013 The Nigerian Stock Exchange 6

7 Industry Trends: A Race to Zero KEY DEVELOPMENTS ORDER BOOK CAPACITY Requirements to act on changes in the market near real-time has led to the Race to Zero Market participants look to optimize the time required to access market data and initiate and execute a trade As network providers continue to reduce latency and increase availability, many exchanges have in turn optimized their order/trade and market data protocols This has also led to the evolution of exchanges towards the offering of trading-related IT services that facilitate automated trading and an increased focus on facilitating trading by for example allowing market participants to host physical servers in the same data center as the trading/ matching engines Accordingly, several exchanges have undergone substantial technology upgrades in order to increase their order book capacity measured by Orders Per Minute (OPMs) as shown in the graph to the right 18-Junel-2013 NYSE Euronext (US Options) LSE Tokyo SE Nasdaq OMX Hong Kong EX ASX Trade Bombay SE JSE 38,000 18,000 3,000 30,000 15,000 1, ,000 20, ,000 30, ,000 *Source: KPMG - Winning platforms, ,000 The Nigerian Stock Exchange 7 500, ,000 1,000,000 Before Upgrade After Upgrade Nigeria Before: ~1,000 After Upgrade: > ,000 1,000,000 1,500,000 Orders Per Minute (OPM)

8 Nigeria On the Road to an Emerging Market CRITERIA FRONTIER MARKET NSE'S CURRENT POSITION EMERGING MARKET Openness to Foreign Ownership Ease of Capital Inflow/Outflow Efficiency of the Operational Framework At least some Significant Significant At least partial Significant Significant Modest Modest Good & Tested Stability of Institutional Framework Modest Modest Modest No. of Cos. with Full Market Cap 2 / $280M 7 / $560M 3 / $560M No. of Cos. with Float Market Cap No. of Cos. with Security Liquidity 2 / $14.5M 4 / $280M 3 / $280M 2 / 2.5% ATVR 1 / 2.5% ATVR 3 / 15% ATVR Repatriation of Capital and Income Modest Significant Significant Foreign Ownership Restrictions Modest Low Low Broker Competition To Ensure High Quality Services 18-Junel-2013 Low Low Modest The Nigerian Stock Exchange 8 The NSE meets 7 of the 9 criteria for an Emerging Mkt 5m Investor Accounts (at CSCS) 117m Mobile Phones 45m with Internet Access 85m B/w ages of N3.1 Tr in Pension Assets N10Tr in Imports for %+ ASI up 30%+ YTD As at 2012

9 A critical pre-requisite for frontier market emergence is enabling technology, facilitating operational efficiency within the markets and their eco-systems. Technology for Capital Markets Emergence Surveillance, Monitoring and Capacity Planning Trading Platform Market Database End to End Process Automation Enabling Technologies Networks Business Continuity Order Management System FIX Protocol

10 Trading Platform and Connectivity Market Data Feed Secure Network New investor access channels FIX Traders/ Market Makers Trading Engine FIX Trader Workstation MM/Broker OMS FIX Post Trade Management SDK CSD Surveillance Market Database

11 Trading Platform A high performance multi-product, multi-asset platform is an essential building block Highly scalable to cater for wider participation of growing middleclass and investing segment of the population Supports global investor participation and offers features such as direct market access and automated trading Architecture must support low latency and maximum system availability for users The trading engine, in addition to order matching, should also carry out functions such as index computation and position keeping

12 Networks Emerging frontier markets need to develop low latency, reliable, secure and scalable data networks that will cater for the on-going evolution of trading Networks must be well designed and optimised, with the ability to carry data at the highest speeds to support the high volumes of buy and sell orders generated by the trading engine

13 Market Database Historical and Real Time Data Historical data usually stored in high performance databases, separate from the core trading engine A lean and mean trading engine can be maintained Business Intelligence Market database essential for the provision of BI services and data products Helps add value to the investment decision making process of market participants Revenue Market data can provide an alternative source of revenue for an exchange

14 Order Management System Many frontier markets do not have automated interfaces between their trading platforms and order management systems brokers are required to manually key orders into the trading system Automation in this area is a key requirement for a market to move from the frontier to emerging classification The implementation of a minimum technology standard for the broker dealer community will be an enabler for technology driven efficiency in these markets It will also engrain best practices in achieving improved levels of transparency and reduced order placement to execution times

15 FIX Protocol The Financial Information Exchange (FIX) protocol has seen widespread adoption by the global capital market participants Fix Adapted for Streaming (FAST) is also an essential baseline requirements for today s trading platforms FIX and FAST utilised by market data vendors and order management system providers to interface with trading engines Trading platform should also be upgradeable to run the Itch and Ouch protocols (where higher performance levels are required by the market)

16 FIX Life Cycle

17 End to End Process Automation Process automation is key to ensuring that the investments in technology and innovation are translated into a high quality service for market participants A continuous improvement process is also required to update operating efficiency and add true value to the experience of market participants CONTINUOUS PROCESS IMPROVEMENT Provision of Audit Trails to track entire order management lifecycle

18 Monitoring and Capacity Planning Real-time Surveillance and monitoring Trading activities, infrastructure and applications need to be monitored in real time to ensure and maintain high availability of systems Pro-active Alerts Diagnostic and capacity management tools provide an early warning system in the event of impending or actual problems Prompt alerting is key in mobilising resources quickly to resolve problems as they arise Tools must also provide the ability to drill down, and present arising alerts from a range of applications, hardware and networking systems via a single administrative interface

19 Business Continuity A robust business continuity plan is essential - it will ensure timely and dependable recovery of services in the event of a disaster The plan must ensure an adequate level of geographical dispersion from the main site, and also support smooth recovery to the backup systems in the shortest practical period of time Business continuity processes should be regularly tested by the Exchange and its wider eco-system of broker-dealers and key market participants LIVE REPLICATED INFRASTRUCTURE SERVICES FOR FAST AND RELIABLE RECOVERY BACKUP

20 Support for New Trading Models Algorithmic Trading Algorithmic trading, also called automated trading, black-box trading, or algo trading, is the use of electronic platforms for entering trading orders with an algorithm which executes pre-programmed trading instructions whose variables may include timing, price, or quantity of the order, or in many cases initiating the order without human intervention Customer Driven Electronic Trading Buyers and sellers of securities are provided with electronic access to trade in the market by their broker dealers via tools that are easily accessible and appropriate to support the customer business. Institutional investors are provided with terminals that link up to the broker dealer order management system while retail investors are provided with access to trade via the internet using a smartphone, tablet device or a traditional computer Direct Market Access This refers to granting institutional investors (known as the buy side) and other traders wishing to trade in securities access to do so directly from the information technology system of their broker-dealer firms to the Exchange s order book, rather than the normal trading method of the buy-side companies passing their orders to the brokerdealer firms trading desk for execution. The technique is often combined with HFT High Frequency Trading High-frequency trading (HFT) is the use of sophisticated technological tools and computer algorithms to rapidly trade securities (a form of Algo trading). HFT uses proprietary trading strategies carried out by computers to move in and out of positions in seconds or fractions of a second. By 2009, HFT accounted for 61% of the US trading market share, but has since reduced to 51% in Junel-2013 The Nigerian Stock Exchange 20

21 Must-Dos for Broker Dealers Be trained and certified to use X-STREAM Participate in Market Readiness Tests Readiness weekends Pre Go-Live Dress Rehearsals Performance load testing Take advantage to participate in User Acceptance Tests Replace Dealing Workstations if not X-NET supplied Diligent in logging any arising issues with the Helpdesk Make investments to improve operational efficiency Make customers aware of the benefits of X-GEN Implement and certify your Order Management System As Early As Possible

22 What will change Day 1 post go-live? New Trading System Automation of Trade Data Input and Output (FIX) Through the Order Management Systems Customer Ability to Place Orders Anywhere, Anytime Improved Platform Stability after Bedding Down Period Improved Market Transparency for all participants Unparalleled Access to Market Data

23 Programme Status - Countdown to Go-Live Signoff Acceptance Testing to end in July Robust and Well Documented Training commenced 29 th July Two Market Readiness Tests planned after completion of Signoff Testing and Training Certification of Order Management System via FIX Protocol has commenced Top 20 Broker-Dealers are implementing OMS Systems Other critical work being finalised includes: - Workstation Implementation on Trading Floor - Performance Testing and Data Migration - Disaster Recovery - Finalisation of Rules and Processes Workload and Confidence Level High for a Q Go Live

24 New Market Structure Structure HORIZON X-STREAM 1 Trading Sessions 4 trading sessions as outlined below: 6 trading sessions as outlined below: - Pre-Open - Pre-Open - Opening Auction - Pre-Open Adjust - Continuous Trading - Continuous Trading - Close - Pre-Close - Pre-Close Adjust 2 Order Duration - Day - Good till month - Good till open - Good till week - Good till date 3 Time in Force Orders - Fill or Kill (FOK) - All or None - Whole or None 4 Matching in The matching priority is price, regular terms before special Continuous Trading terms book, source, order type, cross and time 5 Types of Books - Regular Book: All orders are queued in the Regular book unless they have special settlement or fill terms. - Special terms Book: The special terms book handles orders with special fill and settlement conditions. - End Of Day - Day - Good till date - Immediate - Pre-Close - Fill or Kill (FOK) - Fill and Kill (FAK) The matching priority is price, time and cross. - Public Book: All orders are queued in the public book. X-Stream does not have a special terms book. Definitions An All or None (AON) order is an order that only trades if the entire volume of the order is bought/sold with one or more counter party A whole or none order is an order that only trades if the entire volume of the order is bought/sold by one other counter party s order A Fill or Kill (FOK) order type is a time-in-force designation used in executing a transaction immediately and completely or not at all A Fill and Kill (FAK) order type is a time-in-force designation used in executing a transaction immediately in part or in full or not at all

25 New Market Structure (2) Trading Sessions Pre-Open Pre - Open Adjust Continous Trading Start End Trader Allowed MM Allowed Participating Order Types Participating Order Duration Yes No Limit Session (Good Till Open) Good Till Date Day Price Limit(?) + or - 10% No Yes MM Quote N/A + or - 10% Yes Yes Market Limit MM Quote Immediate Day Good Till Date Negotiated Deals Pre-Close Crossing Orders + or - 10% Circuit Breaker Pre-Close Yes No Limit Good Till Date Day + or - 10% - Pre -Close Adjust No Yes MMQuote N/A + or - 10% - Close

26 Impact on Exchange Participants Local Brokers Order Management Systems Adoption of FIX Implementation of Minimum Technology Standards Cost reduction by scaling up Simplicity and transparency of access by clients Development of New Business Strategies Up-skilling on new products and trading techniques Global Brokers Simple connections, FIX Easier and Faster Market Access Higher Profile for Nigerian Market High volumes/low latency End Users Mobile and flexible access to trade securities Online/Real time price transparency Online Portfolio management and valuation Out of hours order submission Reach of the market regardless of location 1/17/2013 The Nigerian Stock Exchange 26

27 Changing The Customer Experience Improved market liquidity and depth Modern, low- latency, high performance trading platform Fast Remote Trading Capabilities Wider Access to Real Time Data Mass Population and International Reach Unparalleled Automation and Connectivity Support for latest securities trading paradigms Improved market transparency and governance Adherence to standards Best in class regulation

28 Conclusion Our market must be savvy in the identification, implementation and exploitation of appropriate trading technologies as an enabler for the move into the emerging classification Technology must be underpinned with robust business processes to help achieve improved participation and liquidity for their markets, and also offer a basis to grow the markets through increased listing activities and diversified product offerings Mass market participation will be encouraged as a result, thereby creating wealth building opportunities in these markets Additional benefits also include an enhanced experience of doing business in these markets from a market participant and customer perspective How can you/your company benefit from the emergence of frontier markets?

29 Roadmap The journey of a thousand miles.

30 Q & A QUESTIONS?

31 Thank You Whitepaper on the presentation available on: : Stock Exchange House 2-4 Customs Street P.O. Box 2457, Marina Lagos Island, Lagos, Nigeria

32 What do you still see? Frontier or..

33 What do you still see? Emerging.