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Benchmarks and More: The Latest on TCA

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.
Francis soNew Structure
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 buy-and 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.
Choosing Benchmarks
Implementation shortfall is probably the most widely used benchmark that we have at the moment. Even though we will have market orders or careful discretion orders, most order types are normally benchmarked on IS because Portfolio Managers (PMs) already have a specific stock price in mind when they decide to buy or sell. As a proactive desk we interact with our PMs and the market in order to maximise price performance for our client. For example if they send us a ‘Trader Discretion Order’ and we have a sell order on a rising market, we could adapt with the agreement of our PMs to take views. To perform better we may default to an average price benchmark where we expect the average price to be higher than if it was a pure IS trade.
We are currently using a third party TCA product. We provide them with information from our OMS and they provide the TCA not to be compared to our peers, but rather to compare the specific trades we are doing. Results can be quite skewed when comparing TCA between peers, so we prefer to look at how we perform versus client benchmarks.
TCA reports come back well after the trade is completed, so we try to provide feedback on execution to the fund managers intraday or after we execute trades. This makes it much easier for the fund managers to understand what has happened, rather than just looking at the end of day or end of month results and then trying to recall what happened. We are working on a procedure within our OMS, whereby if a manager decides to change his benchmark or limits or strategy for the trade, then we can flag the order in the TCA report.
Fragmentation and TCA
Without a consolidated tape, TCA measurement will be more difficult and results can be skewed. In Asia as with the rest of the world we see increased competition with the Exchanges and advanced use of technology to implement strategies. With this comes greater fragmentation. Exchanges need to innovate and create new products for investors in order to compete with new entrants
Interacting with HFT
Market fragmentation is causing us to look at avenues of liquidity be it dark pools or HFTs. In general we have no issues with HFT flows as long as it is providing good liquidity with low stock volatility. What concerns us most is whether we are being gamed or not. Normally if we are looking for liquidity, we are looking for size and to trade immediately. Often we are in contact with our brokers and we try to know where the flows are so that when an opportunity arises, we can do the trade right away. We have access to dark pools and alternative venues but the use of these is dependent on the objective. If your objective is price improvement, then using these benefits you by lowering spread, but if your objective is liquidity, we prefer to try to find natural blocks.
Overall, we aim at providing our clients with a global connectivity and expertise, while significantly reducing their fixed costs base.

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