Waters Wrap: On EMSs, regulation, and (among others) BlackRock Aladdin

More than a year and a half ago, our Asia editor, Wei-Shen Wong, heard that BlackRock Aladdin was building a dedicated execution management system (EMS), but details were scarce. We often hear rumors that are slightly wrong, entirely wrong, or completely fabricated. So we take the time to talk to lots of people and see if there’s validity to the rumors.

Then, a while later, Josephine Gallagher, who was our senior reporter in London at that time, spoke with an asset manager who had seen a rough demo of what the source called “a direct execution facility” that they believed to be “a point-to-point bilateral execution tool”. The rumor started to sound more real, so Wei-Shen, Josephine, Joanna Wright (our then-Europe editor), and I started talking to as many people as possible…well over three dozen fixed-income and trading technology experts. 

The result of that 18-month effort—an effort that had to be pulled together from conversations in Asia, Europe and the US—can be found here: “What is Aladdin Trader? BlackRock’s fixed-income tool still a mystery”. 

Click on that link to get all the details we have about Aladdin Trader—which we know to exist, as several employees have it named in their LinkedIn bios and it was even mentioned to WatersTechnology for one of our awards in early November. We spoke with a lot of people who have heard about it and explored what it could be. The problem is that when we presented BlackRock with the information we had and sent them a list of questions, they declined to comment. C’est la vie…sometimes that’s part of the game. 

That said, here’s what one BlackRock employee told us: “Aladdin Trader is an EMS functionality built within the OMS. We can’t sell Aladdin Trader to someone who doesn’t use Aladdin. So, someone that uses Aladdin can use the EMS functionality; it’s just embedded in the OMS. It’s an internal project—maybe more an internal-like protocol. But you wouldn’t find Aladdin Trader on the website. Aladdin is an expensive product, right? And it has many modules that firms just wouldn’t hear about in any way as they’re proprietary and not sold separately.”

First, let me be clear: I am not saying that Aladdin Trader is an EMS. That’s one of the questions that BlackRock declined to answer, so at this point, I’m only comfortable saying that, based on our reporting, it offers execution tools/capabilities. The BlackRock employee makes it sound like Aladdin Trader toes the line of an EMS, but it is not a dedicated EMS. 

Aladdin Trader is an EMS functionality built within the OMS. ... It’s an internal project—maybe more an internal-like protocol. But you wouldn’t find Aladdin Trader on the website.

A BlackRock employee

Second, perhaps BlackRock didn’t want to discuss this publicly yet because they’re still working out the precise wording around the product; maybe the firm is gearing up for a big launch; maybe the comms folks want to break the specifics with a publication they’re closer to; or maybe it’s a combination of the three, or none of the three. 

Again, click on that link above (or just click here!) to read more about it, but I want to explore something not specific to BlackRock Aladdin (though there will be a bit more on that toward the end): proposed EMS regulation in Europe and the US. 

The Eye of Sauron(s)

Earlier this year, the European Securities and Markets Authority and the UK’s Financial Conduct Authority each published their final guidance on trading venue parameters, which has been a contentious issue for quite some time. 

Esma stated that any platform bringing together multiple buyers and sellers that might interact with each other could be defined as a “multilateral system”, though it acknowledged that there was no consistent view about what would constitute such a system. Its view was echoed by the FCA, which wrote that a system’s features, rather than the language it used to describe itself, would determine whether it should be regulated.

Now, you can read the (very) deep-dive story on the subject that we published back in August to get all the details, but let me try and distill it.

Especially in the world of fixed income, regulated trading venues have felt that they are being held to an uneven standard with non-venue EMS providers, especially as technology and electronification in fixed income have rapidly evolved over the last few years. Since Mifid II and Mifir came into force in 2018, cloud, machine learning, interop, open source, and, newly, generative AI have created new opportunities for technology providers to better service the fixed-income community. EMS providers, on the other hand, have contended that they are software providers that offer access to trading venues, aggregate prices, and offer workflows or tools with the aim of bringing efficiency to the market, but they do not perform the functions of a trading venue and do not act as counterparties to trades.

The regulators did make note that not all technology providers engaged in venue-adjacent activities have to seek licensing. Services that only broadcast trading interests—so-called bulletin boards—can safely operate outside the perimeter provided users are unable to interact within the system. Platforms that only facilitate communication are also exempt. Even a system that meets all the requirements of a trading venue can avoid the need for authorization if the platform ensures that all facilitated transactions reach a regulated venue.

Both Esma and FCA said that they’d make assessments on a case-by-case basis. “An EMS which would allow for firms to gather quotes from multiple players, allowing these trading interests to interact within the system with other clients’ orders could be, depending on the specifics, a multilateral system and subject to the authorization as a trading venue,” Esma stated.

To meet the definition of a multilateral system, an EMS would have to allow buying and selling interests to interact, even if execution did not take place within the system. Market participants had previously seen execution as a distinguishing feature between trading venues and assistive software services. If execution occurred on the platform, it was more likely to be a trading venue; without execution, a service could consider itself exempt.

However, with their latest guidance, Esma and the FCA extinguished any lingering belief that firms could continue to make this argument. The regulators stated that multilateral facilities involve interaction between participants, and that concluding a contract outside the system does not remove the need to seek authorization. Interaction can mean matching buy and sell interests, or allowing users to request, accept and negotiate the terms of a transaction.

But crucially, rules still need to be put in place to govern these interactions…hence the ambiguity. 

Meanwhile, across the pond, the US Securities and Exchange Commission also has its sights set on the EMS community. Under chair Gary Gensler, the regulator has proposed a raft of new rules aimed at numerous parts of the financial system. Included in that is a proposal that, in many ways, mirrors what’s happening in Europe. Once again, for a deep-dive into the details click here, but let me once again give you the crux of it.

“There’s a lot of talk about whether an EMS would have to register as an ATS, for instance, and I think that caught the industry off guard,” Kevin McPartland, head of market structure and technology research at Coalition Greenwich, told WatersTechnology last year. 

When the SEC proposed to change the definition of ‘exchange,’ the commission deleted the concept of ‘multiple’ and changed the interpretation of ‘makes available non-discretionary interactions.’

Source at a vendor affected by the EU's rule

To understand how the definition changes under the new amendments, consider the example of an EMS. Under the Exchange Act as it is now—SEC Rule 3b-16(a), to be exact—an EMS would fail the exchange litmus test and would therefore not have to register with the SEC.

Currently, under 3b-16(a), a business is considered an exchange if it brings together the orders of multiple buyers and sellers, and if it uses “established, non-discretionary methods”—setting rules for how orders interact or how they provide a trading facility. If a business counts as an exchange, it must register as such under the Exchange Act, or as a broker-dealer under Reg ATS. The latter comes with a lighter compliance burden, with exchange regulation reserved for the likes of systemically important trading venues and clearinghouses and self-regulatory organizations. EMSs do not bring together multiple buyers and sellers, nor do they make available established, non-discretionary methods for orders to interact.

The proposal, however, amends the wording of 3b-16(a) to define an exchange as something that no longer must set rules, but merely has to make available some kind of service for trading, the parameters of which the user can define for itself. It also deletes “multiple” buyers and sellers, replacing it with the concept that an exchange brings together “trading interest”. That could be firm or non-firm trading interest—really any interest submitted to a system.

“When the SEC proposed to change the definition of ‘exchange,’ the commission deleted the concept of ‘multiple’ and changed the interpretation of ‘makes available non-discretionary interactions.’ And suddenly, the regulatory perimeter, which was targeted—just the exchanges and those providing exchange-like functions that were deemed ATSs—now was no longer targeted but rather included more entities,” a source at a vendor that would be affected by this proposal told WatersTechnology.

What’s in a name?

In 2022, Daniel Gourvitch, who was then global head of Aladdin at BlackRock Solutions, stressed to WatersTechnology in an interview that wasn’t published (but was on the record) that Aladdin’s capabilities facilitate communications between Aladdin users and liquidity providers. 

“For example, when an Aladdin user clicks to send an order to a dealer in response to an indication from the dealer, the dealer consumes that message on its own system, executes the trade, and sends a message from its own system back to the Aladdin user. Unlike trading platforms where acceptance or rejection of an order occurs on the platform pursuant to the platform’s rules, no transactions are executed on Aladdin,” he said. 

This is just my opinion, but this comment sounds very specifically worded to define Aladdin outside of the scope of some of those rules. I wasn’t in on that interview (though I read the full transcript), so perhaps I’m reading too much into that quote. Again, I hope to speak with BlackRock executives, on the record, to get more detail. 

Unlike trading platforms where acceptance or rejection of an order occurs on the platform pursuant to the platform’s rules, no transactions are executed on Aladdin

Daniel Gourvitch, who was then global head of Aladdin at BlackRock Solutions

What I can say is that when it comes to EMSs—and specifically in fixed income—there are a lot of questions that need to be answered when it comes to defining trading venues and how EMSs overlap with those facilities. So I think it’s fair to say that verbiage matters.

Think I have something wrong or am misunderstanding something? It wouldn’t be the first time. Sound off: anthony.malakian@infopro-digital.com.

Finally, I need to acknowledge the efforts of Josephine Gallagher and Joanna Wright. They worked tirelessly on this story, and numerous other stories. The former is now at Trader TV, the latter at DL News. While it sucks to see talent leave the organization, there’s a reason why they were poached from WatersTechnology.

The image accompanying this column is “The Card Players” by Paul Cézanne, courtesy of The Met’s open-access policy.