Collaboration Across The Buy-Side
With Neil Joseph, Co-chair of EMEA FIX Trading Community and Senior Trader J.P. Morgan Asset Management; Stuart Baden Powell, Co-chair of EMEA FIX Trading Community; Adam Conn, Co-chair Investment Management Working Group (IMWG), and Head of Trading, Baring Asset Management; Michele Patron, Co-chair IMWG, and Senior Quant Trader AllianceBernstein; Paul Squires, Co-chair IMWG, and Head of Trading at AXA Investment Managers.
Stuart Baden Powell (SBP): Neil, FIX Trading Community EMEA has a number of working groups across the region. Along with other reasonably recently created teams such as the regulatory and the fixed income groups is the Investment Management Working Group. The EMEA IMWG has developed well since its start around 18 months ago and at full strength it has over 10 trillion US Dollars in AUM represented – what is your take on how the group has developed so far?
Neil Joseph (NJ): The group has developed extremely well so far. As one of the newest groups within the FIX Trading Community in EMEA, it is encouraging to see that the membership has already grown to 33 firms. This is helping the buy side have a consolidated view on standards for communicating trading related data as well as prompting the group to address relevant industry wide issues. By having a single voice in all matters relating to standards, we can save replication of efforts across the buy-side and also hopefully for brokers and vendors, as considered and uniform decisions can be made more effectively. Being led by three co-chairs appears to have really helped the group gain traction. Michele, would you like to expand on some areas that the group is currently focusing on and the progress to date?
Michele Patron (MP): As Stuart said, the group was officially formed in early 2012, during the FIX Trading Community EMEA conference. The current leadership structure (Adam, Paul and I) was finalized later that year. From the start we tried to understand which areas we should focus on to bring some added value to the industry. What we’ve typically seen is that, while sell-side representatives are very good at coming together around a table to find solutions to business problems they share, the buy-side has been much less active in that regard. Of course, there had already been some opportunities for the buy-side – either sell-side driven or (semi) independent – to sit down and discuss problems, especially on the regulatory side; but our thinking was that we needed to merge the business interests of our group with the technical pedigree of the FIX Trading Community. So we concentrated on workflows where standardisation can bring benefits to the market participants. Current working streams are: potential use of FIX Protocol for Initial Public Offerings, led by Adam; developments in fixed income trading, driven by Paul; and adoption of execution venue reporting standards in the EMEA region, on my plate. As far as the latter is concerned, we recently ran a buy-side survey in partnership with the Investment Management Association. Some of the early results will be briefly shared below and the rest along with further actions are going to be shared during the 2014 EMEA Conference.
Adam Conn (AC): The attraction to me of being involved with the FIX Trading Community is that whilst there are already some very good forums/quorums established to share experiences; formulate and onwardly communicate opinion; this is an opportunity for all the interest groups within our industry, some maybe with different end objectives, to work together on specific initiatives (as highlighted by Michele) that we identify to do the right thing to enhance market structure. The work on standardisation of venue data and the better identification of the capacity in which a counterparty has acted, for instance, with the caveat that it does not expose fundamental investors to picking off by proprietary trading systems, has benefits to users, end clients and regulators alike. Pushing against the accepted manual norm for IPOs and other new issue applications would also create an openness and transparency to one of the last impenetrable allocation procedures without the need for an imposed solution. The advantage of having co-chairs with diverse day to day responsibilities is we have been able to look at issues affecting both quantitative and fundamental investors across asset classes. As electronic trading accounts for a growing share of fixed income trading; the need for early adoption of a standard language/protocol is in all participants’ best interest.
The multi-asset angle
Paul Squires (PS): Adam and I both head up multiasset class trading desks and I think this ‘extended mandate’ is a trend that is likely to continue to develop as regulatory reform drives change to market structure and operational efficiency becomes a more central focus. That is why we wanted to include fixed income in this predominantly equities-focussed working group (which is equally reflected in the broader FTC global scope). We are already witnessing a high number of industry initiatives emerge (over 30 at our last count) in anticipation of what are likely to be fundamental changes to the way fixed income is traded and we welcome such innovation on the basis that it increases the choice of execution strategy. It does, however, come at a cost to the buy-side as liquidity becomes dispersed across multiple venues that the trader needs access to. These channels may take a number of different formats (executable quotes, crossing networks, order books, streamed price aggregators) but if we can use a common language like FIX the connectivity is harmonised.
As has previously been mentioned, FIX underpinning such a network would reduce costs for all market participants. The real benefit, of course, is if this standardisation of protocol helps to unlock the inventory of bonds that have increasingly been sitting dormant in fixed income asset managers’ portfolios (97% is one estimate we have recently seen). Onto the year ahead we have already identified some areas that we think FIX can assist with as the buy side adapts to the ever-changing market dynamics. Stuart, perhaps you would like to mention some of these?
SBP: Thanks Paul, you are spot on about the multiasset component and this is adding additional value due to a cross-fertilization of ideas within the group and the wider FIX Trading Community that can only be a benefit to the various asset classes. With regard to some of the other areas, the IMWG recently worked in partnership with the Investment Management Association (IMA) to construct a buy side survey on the specific topics of Tag 29 (capacity), 30 (last market) and 851 (posting or taking). The aim was to build on previous legacy work in this area and take stock of where things are today and what we can do for tomorrow. The survey was distributed to the members of the IMA and the IMWG alike. Michele, would you like to take us through some of the key findings?
MP: Back in 2012, the FIX Trading Community published the “Execution Venue Reporting Recommended Best Practices” document. As you said, that provides a comprehensive protocol to communicate to buy siders where and how each single fill has been executed. We have always felt that the topic is quite relevant, both from a strategic and regulatory viewpoint. Therefore, since the very beginning, we have been dedicating a portion of our periodic meetings to covering different aspects of execution reporting. To have a picture as detailed as possible about implementation of the reporting mechanisms and usage on the buy side, the IMA and the FIX Trading Community have recently distributed a brief survey, the response to which was quite wide and enlightening. In general terms, it does appear that – whilst the vast majority of the participants think the information coming from those tags is insightful, there is a chunk which is unable to process the tags internally, or relies on counterparties/third parties to provide analysis around that. For sure, part of the problem is that a full standardisation of reporting has not happened yet: for example, figure 1a shows that 90% of the respondents stressed that Tag 30 does not always contain a MIC code – as advised by the best practices document – and a fair amount of additional work is required to make this nonstandard information usable. In our opinion, the highlight of the survey are shown in figure 1b. This is the consensual need (95.2% of the participants!) for an extra flag in Tag 29 to classify explicitly riskless principal trades. This gives us a clear action point, and we have started working to make this happen.
AC: Another advantage of doing this work within an organisation with global reach is the ability to make this an all-encompassing rather than just regional initiative. With this collegiate approach we hope that Regulators and other Market Authorities will view FIX Trading Community as a resource to achieve beneficial changes in market practice. The more we meet it is clear there are many areas we could eventually work together on that could be enhanced without the need for prescriptive rule making.
Response to FCA paper (CP 13/17)
PS: Back to equities and one of the most immediate topics that needs attention is delivering a response to the FCA’s paper (CP 13/17) on the use of clients’ dealing commissions. While each asset manager will, inevitably, have their own table of commission rates, what is clear is that simply applying a standard commission rate for all clients and all types of execution strategy is no longer appropriate. Again, regardless of the well-intentioned objectives, the practicalities of precisely capturing the full matrix of required rates on each individual trade (bundled or execution-only, dependent on market or execution strategy etc) is not straightforward. Furthermore, identifying the correct commission rate on each trade may be one thing but efficiently transmitting that detail to your counterpart is another (particularly when many trades are now matched at block level). The FIX Tag 12 (commission rate) is a means by which we think a lot of these operational problems could be mitigated so we are looking to see how we can promote its use and support amongst our community and its systems. As before, any progress we can make will only additionally benefit our sell-side colleagues so there is a common interest and this reflects how we – as a group – can react to market developments as they emerge.
NJ: Yet, another example of new work to be progressed this year and as Michele has already mentioned with Tags 29 and 30, it’s not just the introduction of new tags and standards but also the promotion of usage and possible changes to usage that are often a large part of the work. Further supporting Adam’s point regarding the benefits of the FIX Trading Community being a global organisation, is the IMWG now working so closely with its equivalent group in the US and with Asia as well as also forming the Global Buy-side Committee which provides Adam, Michele and Paul a seat on the Global Steering Committee. So in summary, the relatively new group has grown quickly and benefited from its diversity of membership. The areas covered so far and including, last market and last capacity and the work to use FIX or IPOs are seen as having direct benefit to many desks including my own. With numerous initiatives underway and planned for 2014, we expect to see further benefits across a range of issues covering multiple asset classes.