BNP Paribas Dealing Services Asia’s Francis So opens up about their new structure, how they use Transaction Cost Analysis (TCA) and their preferences regarding dark pools and High Frequency Trading (HFT) flow.
The Hong Kong dealing desk has been restructured as an externalised/outsourced dealing desk for the buy-side. As a result we are now independent of the asset management group and belong to BNP Paribas Securities Services. Our current name is BNP Paribas Fin’AMS Asia Ltd but this will soon change to BNP Paribas Dealing Services, better reflecting the services we provide. BNP Paribas Securities Services provides middle and back office outsourcing services for buyand sell- side, as well as corporate clients. This new dealing service allows us to provide a full suite of front to back office solutions to meet the needs of the clients. The trend has been for the outsourcing of back office activities and I think it is only a natural progression to consider front office activities. Given the market environment, cost reduction is a key element for asset managers/asset owners. Outsourcing the dealing activity can help reduce cost but more importantly allows the asset manager to focus on delivering greater value to their clients. Our Paris office has been very successful in attracting external clients and in Asia we plan to ramp up activity in 2012.
We treat BNP Paribas Investment Partners (the asset management company of the Group) as one of our most sophisticated clients and as such must ensure that the services provided to them are kept to the highest standard. This will be the same for new clients as one of the keys to attracting and maintaining new client relationships is our ability to provide tailor made solutions and services. Clients can range from new start-ups to existing asset managers that already have a dealing desk. We offer flexibility to asset managers such that they can choose the asset class and/or geographical region they want to outsource. For example, some asset managers that already have dealing capabilities in their home market may decide to invest in overseas markets or new asset classes. They need to ask themselves whether it makes sense from a cost perspective to create a new dealing desk where initial volume is expected to remain low.
We have the knowledge, the expertise and the global reach. We have locations in Europe and Asia to cover all asset classes globally. We also serve fund managers located in different geographical regions.
It is important to stress that we are in no way competing against the sell-side. Our clients keep their contractual and daily relationships with brokers. We act as an agency-only trading desk and we do not have any prop flow or take any positions.
We work together with the portfolio manager to determine what benchmarks best suit their needs. They are able to send orders to our global Order Management System (OMS) with a specific benchmark. By doing so, we can measure our execution performance using their specified benchmark, be it Implementation Shortfall (IS), VWAP or a specific measurable benchmark.
While Madoff maybe a dirty word for many investors, the scandal at the end of 2008 certainly helped propel the often forgotten operational departments of an asset manager into the limelight.
Never before had so many institutional investors got caught up in such heavy losses caused directly by the lack of internal controls and oversight at an asset management firm. Historically, losses had been mainly driven by poor performance from asset classes, for example the equity markets after the tech bubble burst. The Madoff scandal highlighted investors’ need to understand much more than the team running money on their behalf.
Pre-Madoff most institutional investors focussed the vast majority of their efforts selecting an asset manager based on investment process and portfolio strategy. In the new world the selection process for identifying asset managers has become more rigorous, with many more investors focusing on the quality of the operations, control and support functions, in addition to the portfolio management team. An institutional investor study carried out by Mercer in 2009 found 41% of respondents carried out some sort of operational due diligence in 2009, up from 13% in 2008.
As investors start to embrace operational due diligence, it is having a material impact on the way asset managers position themselves during the selection process, and more importantly, the actual controls and processes applied behind the scenes. For the first time, asset managers are being asked questions about their audit process, their compliance department, valuation methodologies and pricing sources.
On top of a strong investment process, investors are looking for:
A strong organisational structure promoting good corporate governance
Formal segregation of duties between front and back office activities
Infrastructure and systems to match the size and complexity of assets under management
Appropriately experienced and qualified staff
Documented policies and procedures
Reputable service providers including lawyers, auditors, custodians and administrators
Robust back-up plans in case of disruptions due to power failures or other disruptive events
In order to find answers to the points listed above, many investors are attending meetings on-site or appointing a specialist operational due diligence provider to review an asset manager’s operations, control and support functions. Again this is a major change from existing behaviour where most of the selection process took place at the investor’s or a consultant’s office.
The informal feedback Mercer has gathered indicates that many investors are surprised by some of the findings at asset managers. There have been instances of asset managers running their whole technology infrastructure using spreadsheets, and fax machines heavily used for asset confirmation. Whilst these types of processes were acceptable in the 1990s they are not sufficiently robust for current day asset managers with many employees running complex products, managing millions or billions of investor’s money. Both of these examples show a lack of investment in infrastructure and the reliance on manual processes, which increase the probability of losses through mistakes or fraud.
Other issues uncovered reveal a more fundamental issue with the business model of a firm. A basic requirement of any asset manager is to demonstrate a clear segregation of duties between front and back office staff. Barings and Nick Leeson was a prime example of where a lack of segregation of duties can bring disastrous consequences. As the front office trader, Nick had influence over the back office, which allowed trades to be hidden in the now infamous 888 Account. All too often asset managers allow some individuals to both execute and confirm trades, breaking down the fundamental segregation of duties between doers and checkers vital to maintaining the integrity of the investment process and reducing the risk of mistakes or fraud.
Like a sprinter racing for a gold medal, the traders’ ability to take advantage of latency is influenced not only by their skill as a trader, but also the tools they have at their disposal including hardware and software architecture, network topology and physical distance from execution venues, writes BT Radianz Services’ Matthew Lempriere .
With the 2012 Olympics in sight, all eyes will turn to London (especially those of the BT team, as the official communications partner of the Olympics and Paralympics), where we will watch world class athletes participate in tough and demanding events where a split second can make the difference between winning and losing. But what we should remember is that the competitive edge that an athlete gains over their rivals does not just come down to the individual themselves, but the infrastructure that they have around them; such as kit, training conditions and diet. A combination of these things will ultimately come together and be the key to beating the competition and winning gold.
The same is true in the world of electronic trading. The innovative brains behind the most cutting-edge instruments or complex trade strategies on today’s trading floors would be incapable of making their concepts become a reality without the modern technological infrastructure that is built around them. Where low latency was once an exclusive playground for arbitrage specialists and market makers, it has now become main-stream and is no longer confined to specialist trading systems, but is a requirement for all advanced trading strategies.
As well as coming into the mainstream, increasingly innovative trading strategies and their reliance on the latest, most advanced technology, such as algorithmic and quantitative trading, has pushed the issues of automation, latency and risk management technology further up the agenda. Latency is critical to take advantage of the swings in price and increase in order flow, and is grabbing board-level attention with senior latency-related positions being created within financial institutions to ensure that sustained focus is put on trading desks’ latency capabilities and for taking advantage of low latency to remain competitive. The rise of complex financial instruments has done much to propel reliance on technology further amongst both buy-side and sell-side organisations. This has happened to such an extent that the traditional division between the front and back office, in terms of their relative importance to the trade process, has been almost eradicated. Complex instruments, evolving investment vehicles, regulation and increased investor sophistication have caused the gap between the front and back office functions to narrow considerably. Technology, from the front office through to the back office, must move in tandem to enable the industry to be able to sustain growth and innovation.
In Europe, the trading landscape has undoubtedly changed in recent years with technological innovation and regulatory change – with initiatives such as the Markets in Financial Instruments Directive (MiFID) – providing the catalyst for a rise in alternative trading venues and off-exchange order books. These alternative trading venues have been responsible for growth in the number of trades made as large block orders that may be sliced into smaller bundles of trades to obscure them from the market. In Asia, we have a variety of different markets each with their own set of rules and regulations, so the technology must be able to react and interface with multiple venues. Both network and server technologies have had to provide the capacity for financial institutions to scale and take advantage of these increased volumes.
In response to this changing landscape the buy-side has needed to expand their use of algorithmic trading, direct market access and smart order routing technology to take advantage of liquidity fragmentation and alternative trading venues – the by-product of a post-MiFID world. The take-up of FIX standards by the buy- and sell-side in recent years has also stimulated the blossoming of electronic trading systems and algorithmic trading strategies.