Blocks And The Broker Review
By Kent Rossiter, Head of Asia Pacific Trading, Allianz Global Investors
There are risks around everything we do, and every decision our traders take impacts the final results of our executions. We need to understand the signals and act to the best of our abilities. Risk is central to what traders do, day-in, and day-out: we need to look at the benefits of risk instead of fearing it. Too often a trader’s natural instinct is to hedge themselves by dragging trades out through the whole day even when they’ve got strong conviction that they’d be better off taking another course of action. This is the type of behaviour we monitor on the desk and look to change. We have to be open to new technology; some new vendors are very innovative, while others appear to have little differentiation from established products and don’t appear to add any real value.
For equity TCA we constantly review our brokers on a global basis. We feel it’s important to view our results as best we can against our peers, and our TCA vendor arguably has the largest peer data-set with which to work. Monitoring our executions is an ever-improving process but we are very pleased with our long-term TCA results and peer rankings.
We work with brokers every day and we’ve known a lot of our counterparts for decades. Over this long time we’ve come to know who’s likely to be the most helpful or knowledgeable about different trading situations and markets. Naturally we want them to be there to help us in the future, so we need to pay the people who can benefit our clients trading activities. Those brokers most successful in matching up IOIs are likely to be the brokers getting our highest votes as well. However, the voting is not just restricted to that one important service. It also rewards them for good trading calls, execution skills, being able to watch our orders carefully, responsiveness to our IB chats, and so on. And so it’s not just focused on blocks but the end-result of the whole execution process.
Globally AllianzGI has three main regional voting groups which are the European-based investment teams, the investment teams based in America and the investment teams based in Asia. Each of the different regional team members will vote for the brokers they feel provide the best service. But for example, if the US team votes a certain amount of money to go to one broker, and we don’t end up trading with them in Asia, then that broker can be paid by the US and European trading desks. Or if we are getting exceptional service from a particular broker we may trade a lot with them here in Asia, in which case the US and Europe may trade with them far less. Another situation is where the PM might be voting for that broker because they like the US consumer research analyst, but from a trading standpoint, we find that broker to be excellent in Korea, Taiwan and Japan tech names so instead trade a lot with them out here in Asia to pay them. And there are situations where some brokers just are poor at executions or technology everywhere and we don’t feel comfortable paying them through trading activities. In this case we have Commission Sharing Agreements (CSA’s) in place and can pay them from that pool.
As a consequence it is very important that we sit down with the brokers and be transparent as to where they’re getting the votes from. Every half year, our main brokers come in and we all sit down and go over with them who from our regions are voting for them. When we sit down with the broker, they know which fund manager or tech team appreciates their service even though we might be paying them through a completely different avenue. In that way, the people who are actually providing the service on the research side get rewarded and at the same time, the brokers can clearly see that we trade with them a lot in a given area, and because of that, the broker can assume that they have a good franchise servicing that need.
Generally as an outcome of the vote we have 75 or 80 different brokers or research outfits tagged. The latter research outfits don’t have execution capabilities so we end up trading with one of our top brokers who we have the aforementioned CSA program set up with. And then every half year we’ll figure out how much from the CSA program we need to pay these external research providers and organize the payments so they still get rewarded.
Actual market liquidity in a stock we want to buy or sell doesn’t necessarily exist when we need to be doing that buying or selling. When orders are of block size it often doesn’t make sense to test the waters getting small executions because we might not make much progress before we find ourselves pushing the stock price. By putting out some feelers in the right places we often get a look at contra-liquidity before an order goes into the market. Patience doesn’t always pan out however. Finding and trading blocks is therefore often a timing decision, with a bit of good luck thrown in. It is not worth immediately going to the market just because we happen to get the order at 10:08am. If the liquidity is not there, we might want to wait and be a bit more patient to try to line up blocks by talking with our contacts or using the technology which is out there.
We’re able to do the searching ourselves but the fact is we still find most of the flow through our large panel of brokers. Without the information from these brokers, we would have far fewer matches and fewer trading opportunities.
Many crossing platforms are very innovative and they’re moving in the right direction. Often we’ll see five IOIs in a name from brokers so we decide whether we want to negotiate with the broker or try our luck in the anonymous electronic matching systems.
One of the most satisfying results, which only happens rarely, is trying to match up flow and let PM’s know of outsized block flow we may see on the Street, even when we don’t have live orders. When our PM’s hear about such opportunities they can be quite responsive and generate an order on the back of it. That’s a win-win for both sides; we each get to execute size that wouldn’t have ever been there in the market if it weren’t for that initial call.
And sometimes a broker comes to us. They know that we’re a big holder, either because we’ve traded the stock with them before in size, or they can see us as a significant shareholder on the Bloomberg HDS page or another reporting system. The broker will come and tell us that they have a chunky size in case we’re interested. Even though I might not have an order on my desk, it provides the perfect opportunity to go to the PM and see if they want to take advantage of the unexpected liquidity.
The great thing about doing this is that there was only one side of the trade to start with. The other side didn’t exist and yet because we work with the broker and PM together, we are able to create something. Accomplishing this requires communication with our PM’s, and skill and trust between the brokers and the buy-side, something that won’t likely be automated anytime soon.
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