Senrigan’s Head of Trading, John Tompkins, and RBS’ Andrew Freyre-Sanders discuss the way event based funds use liquidity and the effect of ID markets in Asia.
Andrew Freyre-Sanders, RBS: What would you say Senrigan is known for among Asia hedge funds?
John Tompkins, Senrigan: What we are most known for now is being an event-driven fund that is entirely based out of Asia. Nick Taylor founded Senrigan in 2009, and he is known for doing event-driven trading and has been verysuccessful at it. Nick was at Goldman Sachs and Credit Suisse, where he ran Modal Capital Partners for nine years before going to Citadel with his team. Senrigan’s capital raising and first year metrics made the first two years a success.
AFS: I know you trade in the US and Europe as well, so is the global fund entirely based out of Asia?
JT: The entire firm is based in Hong Kong, although we have some analysts who spend extended periods of time in the regions of focus. If we do any US and European trading, it always has an Asian bent to it; for example, a UK or European listed company that has a large percentage of their business located in Asia. The few examples are Renault-Nissan, all the Chinese Depository Receipts (DRs) in the US and some Canadian companies doing M&A into Australia.
AFS: Event driven funds require quick access to liquidity. How does the type of deal or event catalyst affect the relative weighting of these items?
JT: The exchanges and companies are smarter, so they generally halt or suspend the names coming into the announcement, and then you have a short window until a given stock starts to trade up towards the terms. Any reasonably-sized fund is not going to be able to get anything done in that time period. After the event, the main concern is your targeted rate of return for the particular deal, which is impacted by the closing timeframe, surrounding risk, regulatory approval, dividend payments, etc, and you set levels where you want to be involved.
Traditionally safe deals with very tight spreads are viewed as the simplest way to risk-reduce, so people take those off and we give liquidity then because we are comfortable with what we are taking on. A lot of people think about the event as just the announcement on the day, but it is actually the time between when you see it and the range gets set. Only if it closes sporadically do you need access to greater liquidity; most of the time, you just need to be in touch with providers rather than have direct access.
AFS: From a trading perspective, once a deal is gone, it is not about that deal. The only speed liquidity advantage is in having systems that can take advantage of the spreads when they may be moving around a certain level. Is that the case for you?
JT: It definitely is. The big differences between Europe and Asia are the number of auctions and the number of times stocks stop trading, which is quite significant. Between three and four distinct times a day, you will have dislocations in spreads for a variety of reasons, and this is an opportunity to improve. Beyond that, a majority of sell-side firms are setting up their own dark pools and there are alternative exchanges in Japan. In those venues, we deal with liquidity providers and market makers who do not care about the individual mechanics of a name; they simply care about the level of spread that they can access.
The most relevant thing is making sure you have the connectivity turned on to access all the forms of liquidity that exist. There is a big differentiation between counterparties in Asia from an executing broker’s standpoint: e.g. what is their default, what do they turn on for you right away, whatcountries do they have their crossing engines in, who do they have in their pool as liquidity providers? You have to know to ask those questions, and it has been very helpful to do that.
Fragmentation has evolved in the U.S. and Europe, but the diverse Asian markets are likely to forge their own course, as technological advances and regulatory developments make their impact felt around the region, argues Steve Grob, Strategy Director at Fidessa.
Fragmentation of liquidity has completely reshaped the equities trading landscape in the US and in Europe. It changed the roles of market participants forever by breaking the national monopolies of major exchanges and replacing them with a dazzling array of lit and dark venues. At the same time, it has also blurred the previously clear cut distinction between venues, brokers and buy-sides as each jostles for position in the new liquidity workflow. The next generation of winners and losers is now emerging – the trading equivalent of the“haves” and “have nots” – as different market players seek to embrace the challenge of fragmentation and turn it to their advantage.
This article looks at what may happen across Asian markets in terms of fragmentation. There are, of course, many differences between the trading environment across Asia and the more homogonous environments we see in Europe and, particularly, in the US. Top of the list is the fact there is nothing like the regulatory mandate for change in Asia as we have witnessed in the US and in Europe. Nevertheless, a number of isolated “bush fires”have already broken out in the region, and these raise the issue of whether fragmentation will really take hold and how it might spread. And, if it does, how will it be similar (or different) to our experiences in other parts of the globe?
RegNMS and its European cous
RegNMS and its European cousin MiFID were two pieces of legislation that introduced a concept of “best execution” for both retail and institutional investors aimed at providing greater transparency throughout the whole trading life-cycle. This was achieved by dismantling the national monopolies of the existing stock exchanges and fostering the creation of low cost alternative venues that focussed solely on providing markets for secondary trading in equities. Because these new venues were unencumbered by the other operations of stock exchanges (primary listings, trade reporting, supervision, etc.) they were able to operate on a much smaller cost base. These venues also invested in the latest matching technology which operated faster and at lower cost. The net result of this was that ECNs in the US and MTFs in Europe were able to aggressively compete for trading volumes and, in many cases, caught the incumbent exchanges napping. On top of this, they also introduced maker-taker pricing models which rewarded participants for posting passive liquidity and charged traders for removing or aggregating liquidity.
Many of these new venues were backed by the new Electronic Liquidity Providers (ELPs) such as Getco, Citadel, Optiver and Knight. These firms are able to use their technological prowess to benefit from tiny differences in prices and trading fees between the different venues. Such is their dominance that, according to the TABB Group, High Frequency Trading (HFT) of this sort now accounts for nearly 50% of US equities volume and over a third of the trading in Europe.
The large banks and brokers sought to leverage their own crossing networks against this backdrop too, whilst the alternative and primary market centres also jumped at the opportunity to introduce their own “dark pools” into the mix.