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Feature Q3 2021

Managing Liquidity Post-COVID and Post-Brexit

With Adam Conn, Head of Trading, Baillie Gifford

Briefly describe Baillie Gifford and the profile of its trading desk? 

Baillie Gifford is an investment management firm founded in 1908. Our aim is to add value for clients, support companies and benefit society through thoughtful long-term investment. Headquartered in Edinburgh, with offices around the world, we remain an independent private partnership. The firm has US$487bn of assets under management and advice. 

Adam Conn, Baillie Gifford

The team trades across asset classes with a strong client-first ethos. Amid the pandemic we took our Hong Kong trading desk live and now operate from two locations. We cover the Americas from our headquarters in Edinburgh while keeping a watching brief on market structure and liquidity trends, as well as initiatives such as DTCC’s recent ‘T+1’ white paper. Our ambition is to continue adding incremental value to the investment process. One of the consequences of remote working was the adoption of messaging and video technology which is bringing Investors and Traders closer together. We equally enjoy speaking directly with Baillie Gifford’s clients. Effective dialogue is two-way. We are always happy to explain our processes; share our views and learn from each other. 

Our trading desk also continues to engage externally. Among other memberships, we are a member of the Plato Partnership, looking at ways to enhance European market structure and engaging in a new, ESG related, ‘sustainable trading’ initiative that is getting off the ground.

Do you see your firm as a liquidity provider?

I was recently privileged to moderate an excellent panel on liquidity trends at the 2021 FIX EMEA conference. The panel consisted of market structure thought leaders Jerry Avenell (CBOE) Simon Gallagher (Euronext), Laetitia Visconti (Barclays) and the evergreen Simon Dove (Instinet). This was a question I posed to each panellist, and while the trading venues and agency broker described themselves as liquidity enablers, the SI operating investment bank saw itself as a liquidity provider, all of which makes perfect sense. To answer your question, given the nature of our business and long-term reputation, we very much regard ourselves as a liquidity provider. We strive to be the perfect liquidity partner that is a trusted source, with no onward leakage. 

What do you see as the biggest liquidity challenges with regard to the upcoming MiFID reviews, and how are you planning to address these challenges?

It is always a good idea to remind ourselves who markets are supposed to serve, and to me that is society as a whole. Markets enable the efficient allocation of capital to finance economic growth for the benefit of all participants. This sometimes gets lost in the market structure debate but should be front and centre. All the participants in the panel are engaged in worthy innovation – from new liquidity seeking tools to addressing inefficiencies within the infrastructure plumbing. 

As Jerry pointed out on the panel, much of the regulatory change is pretty positive but there are some contentious elements that need reviewing. Of course, it’s not just the upcoming MiFID review, but also the UK’s Wholesale Market Review we are engaging with. Referring back to the panel, it was clear that each of us, representing very different parts of the market, wants to move on from the lit versus dark or the mid-point pricing debates that still vex some of those that govern our markets. I continue to argue that asset managers, as stewards of global savers and investors, represent the true retail investor. Yes, private investors that manage their own savings need a say and what we continue to argue for is choice. It should never be about mandating one form of trading over another. Rather, it’s about encouraging innovation to get our clients the best outcome. Fragmentation for fragmentation’s sake does not help anyone and neither does mandating what can trade where. The current ESMA consultation which includes consideration to ban periodic auctions puzzles me. After all, why would the market not encourage relatively frictionless trading mechanisms? For us, it’s about finding smart ways to trade depending on the outcome we want to achieve. Our panellists and other industry thought leaders, such as Dr. Robert Barnes at Turquoise, are more interested in ‘enabling’ institutions to cross blocks in a way that reduces any drag on our client’s assets. When we trade, we are effectively seeing what options are available to us, evaluating the best trading strategy for our clients and selecting where we are going to get the best result. 

A lot is said about enabling technology but let’s also remember the human factor. We are fortunate to interact with a group of exceptionally talented ‘high touch’ sales traders. We are also looking to build relationships in the syndicate world. There is still a big place for high touch trading in an efficient market structure.

What is ‘executable liquidity’? Is it important that there be an agreed-upon definition of this? 

The key point is to make sure that all the data being looked at is accurate ahead of making changes to regulatory policy. It’s certainly not just executable liquidity that needs a once-and-for-all, agreed upon definition. Our trading data analysis team is fully integrated into our team and is starting to present its findings to both our investors and traders. To be at their most effective, we need good data. Data that is consistent. Data that is labelled accurately and means the same thing to all participants. It sounds simple enough yet seemingly difficult to agree on. There is a lot of good work led by the FIX Trading Community, going into creating a golden source of data in the form of a consolidated tape for both equities and OTC instruments. In my opinion, this data also needs to be available at an affordable price that allows all market participants to go about their business on a level playing field. I’m sure I once read that delayed post-trade data should be made available free of charge.

To my mind, executable volume counts the number of shares, regardless which venue it is located on (lit or dark is somewhat immaterial) that can be traded against. This excludes certain types of in-house crossing and VWAP prints that double-count what is already reported. The reason I delayed immediately answering the question is to highlight the importance of knowing how much is really traded. Simon Dove spoke enthusiastically about using intelligence (machine learning/artificial intelligence) to empower their customers to make better trading decisions. Laetitia Visconti similarly enthused on ideas her firm is developing for exciting initiatives, which need accurate data. It is an important part of liquidity calculations that underpin the management of systemic risk across the market and ensures clients are guaranteed to get their assets returned in an orderly manner. To my mind, this is far more important than protecting any one group of market participants.

Some market participants/observers believe that levels of off-market trading are overstated, perhaps double-counted or based on dated information. Is this a problem?

I think we already addressed this when discussing executable liquidity and it was heartening to hear all panellists wanting to move the debate along. What is worthy of further discussion is how we fix the problem. As previously stated, the biggest problem I see in the world of data is consistency. It’s been talked about for too long and what we now urgently need is one set of flags, or trade condition codes that are clearly defined and adopted by all. Anyone not using it would then be acting in their own interest first and possibly to be avoided. As the neutral hub of the trading world, I believe FIX is the natural place to agree this. As luck would have it, FIX already owns the Market Model Typology (MMT) that seems to be exactly fit for purpose. 

Going back to executable liquidity, I don’t feel we can underestimate the importance of the value of accurate reporting, in knowing what really is trading in the market. Outside of Europe, blocks printed under ‘Reg M’ never hit the tape and there are similar examples across Asia. I would love to see the International Organization of Securities Commissions (IOSCO) direct global regulators to insist all executable liquidity is uniformly reported (albeit with agreed latency as appropriate) to address systemic risk in the market. I don’t think this gets the attention or is treated with the importance it deserves. 

What is important for buy-side traders with regard to innovation? What is one piece of innovation that you’d like to move forward? 

It seems crazy that IPO and placing applications, some of the largest orders a desk might place, still need to be handled manually. Some banks are recognising the problem from their side and asking clients to enter orders on a portal, but for us, this is still manual. I cannot see a good reason why electronic straight-through processing cannot take an order from a pre-trade compliance checked buyside Order Management System through to a syndicate desk, and for the allocation to be sent back the same way?

In terms of your interaction with market authorities, whether in the EU or the UK, what is the key thing that you’re pushing for?

It seems odd that if you are based in the US or Australia, for example, you can trade a stock wherever you like. I hope we can get past political concerns and get on with creating an efficient market that funds the recovery and long-term growth of the whole region. Rather than ask for world peace, the key is innovation. More efficient ways to unlock unique liquidity with the choice of which tools to use and to electronify manual processes. Whatever happens next, it’s key that future regulatory change is based on consistent, accurate and affordable data. It is encouraging to see data influencing the direction of CSDR implementation with market participants generally accepting of penalty fines but not mandatory buy-ins which, it is feared, is likely to hurt liquidity in harder to trade instruments. 

What’s important to note in terms of market resiliency?

This topic came to the fore in 2020 after a mini-series of global primary exchange trading system failures. Markets need to set an official close if only to accurately value the stocks it trades. What gets less press, but is equally valid, is the need to invest or return a client’s assets in a timely and orderly manner. There are two things that can be done to facilitate continuous trading. Firstly, the greater use of EBBO pricing sources rather than an overreliance on the primary exchange and seemingly more contentiously, when an exchange suffers a technical failure, it hands over the trading of its securities to another venue (regardless of the domicile of its owner). 

Where does your firm stand on creating alternatives to the official close? Is it a good idea because it lowers costs, or is it a bad idea because it reduces access to liquidity?

Different people will take different stances on this. To me, fragmentation of the close risks reducing the liquidity our clients might interact with and is undesirable. That said, I understand some primary exchanges charge more to participate in the close than in continuous trading and that is breeding competitive innovation.