Joe Kassel, Head of Global Dealing and Exposure Management, AMP Capital examines the changing role of data and technology, and the impact on trust.
My responsibilities at AMP Capital include relationship management, providing best execution, ensuring that we have proper regimes in place to conduct TCA and that we have a good risk framework in terms of where and how we route, who we are routing with, and who is giving us the best prices across asset classes.
In certain jurisdictions there is increasing pressure on the buy-side to have a deeper and closer understanding of the algos being used when we are going straight to market and certifying our knowledge of those algos. Of course, knowing exactly how our orders are handled is not new to institutional traders but fragmentation of liquidity pools and electronification has led to new considerations such as the participants and toxicity within dark pools and, more recently, the conduct of dark pool operators themselves. From a buy-side point of view, as the microstructure of markets becomes more sophisticated so too does the requirement to be resourced properly to police our counterparties’ behaviour. As a result, more than ever, trust and transparency are the primary drivers of our interactions and relationships with brokers and banks.
There is a tremendous opportunity for the buy-side to manage and analyse our own data. With regard to TCA, there are many different brokers with a multitude of ways of calculating reports and there are a number of forms of data standardisation.
Currently, we engage third party experts to analyse our data and provide independent review and insights into our trading activity, patterns and cost outcomes. But to a greater extent, there is the opportunity now for us to analyse that data ourselves, which is something that we are starting to do more of from a TCA point of view.
Consequently, in terms of that third party position however, the focus is moving more towards real time decision support, TCA in terms of destination selection and performance of various dark pools and how SORs work, etc.
We do need to ensure that the wider basis for analysing costs does not get lost in the more granular analysis of real time decision support. Ultimately this wider area is where we are going to find our biggest savings on decisions that should not have been made in the first place from a trading point of view. This is where we will find those ‘holes’ in terms of market access and our ability to access liquidity quickly and globally. The data now available to us is at a peak level across all our activity – across all asset classes. Our data has that information embedded in it, as well as the information that we can extract in terms of the historical behaviour of counterparties and the historical outcomes across the markets. However, there is still much to be learned in order to better analyse those wider trends in behaviour.
We do require decision support, whether it is software or real time analytics, and it could be something that we develop ourselves or alternatively have our counterparties provide for us. And that decision support helps inform how we route our orders, where we execute and with whom we execute. Ultimately however, the outcome of that trade from a whole cost analysis point of view will be revealed in the longer time frame analysis.
Cross asset standardisation
We are still finding that many of the processes and relationships across asset classes are still relatively siloed. From my perspective the evolution of TCA and 3rd party information systems in equity markets is a very good reference point for the evolving regimes in other asset classes. In particular we can easily transfer equity market principles to futures, which are traded on an agency basis. And that is one step away from FX that is executed versus price benchmarks.
In terms of translating that into fixed income, currently the situation is to compare against prevailing market levels and stored RFQs, and refer to historical data in terms of ‘the trade relative to pricing’. However, this is evolving in terms of our ability to store the data, and then to reference the execution process against the prevailing historical tick data.
Impact on sell-side relationships
The buy-side is not trying to drive spreads to zero, because that is in no one’s interest. But before we get to that point there is still some margin compression to happen. It is not our role to preserve margins for our counterparties, but it is certainly not our role to make them go away either.
Our role is to know what the marginal cost of dealing is, and to assess where it is reasonable. And we can compare that in a number of ways. A long as there are sufficient providers of services with sufficient margin in their businesses then we will continue to have the means to deal where we need to be dealing.
We also have a duty to trade on a best execution basis. Our position is to ensure that we are properly set up to access liquidity wherever we can find it. We need to verify on a trade-by-trade basis that we are dealing at the right price and a necessary part of that role is to be able to confirm that those are the right prices.
Regulatory impact on trust
The impact of regulation is definitely driving some of our concerns. An example of this is the ongoing discussion about commission rates and what client commissions can be used for. One point that has been missed by many is how the market has responded to this concern of commissions over time, and the fact is that it has responded quite successfully.
We conducted some internal analysis to look at our equity commission rates in the Australian markets over the last 25 years. Broadly speaking, the result was that over the last 25 years, our equity commission rates in Australia have fallen by 1 basis point per year. This is a very good outcome and is a real reflection of how seriously we take our responsibility to manage our clients’ money effectively. It is also a satisfactory response in the Australian market to the perception of regulators in some jurisdictions that managers of institutional investors are failing to ensure that that they are not paying too much of their clients’ money towards execution and research.
Our ability to analyse our own activities is getting more sophisticated, as is our ability to analyse peak data in the market, to connect to liquidity pools, to understand who the market’s participants are and how they behave, and how to navigate our way around misbehaviours using minimum acceptable quantities, and avoiding certain dark pools with high levels of toxicity. Ultimately we do rely on third parties to act as agents for us which means that they must act in our interest in an ethical and proper manner. So it comes back to trust, which cannot be regulated or processed or technologised away.
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