The Changing Desk
By Joe Kassel, Head of Global Equities Dealing and Exposure Management, AMP Capital.
There have been significant developments to trading platforms in the last five years or so. Prior to that most internal systems were developed in-house; then five or six years ago there was a major project across the organisation to review the range of platforms that we were using from an equity investment management point of view (and across other asset classes) and the decision was made to purchase the Charles River investment management system. Since then the system has continued to evolve (we are now on version 9.1.4) as has our usage of it. It is still front and centre for mandate compliance but is also now pretty closely embedded across portfolio managers and we are increasingly using it for EMS purposes as well. Since the decision was taken to use Charles River, the business has continued to globalise. We now have a global trading presence in Chicago for our Global REITs and Global Listed Infrastructure funds as well as investment teams in Hong Kong for our dedicated Asian funds as well as London. That said, we also use ITG’s Triton as our EMS for our Asia-Pac trading and are looking at EMSX for our global trading for pre-trade analytics and market monitoring.
Are you finding that over time you’re reducing the number of vendors that you’re engaged with or are you expanding that number?
Certainly we are very conscious of trying not to proliferate vendors. There was a mini explosion in the early 2000s where it was not unusual to have three, four, five or even six EMSs on a single trading desk. Since then we’ve evolved, some of the EMSs have gone and we’re very conscious of picking and sticking a little bit more. And so, the Triton application we use was a considered choice and something that’s working quite well for us in the Asia-Pacific region. We’re also conscious of trying not to proliferate FIX connections out of multiple systems and I know that’s probably appreciated by our counterparties too. On the electronic side, coverage is now global and by far the majority of the flow is via electronic trading rather than using more traditional methods.
We are still building out our electronic trading strategies and technologies. We have made a concerted effort to push into that space over the last twelve months. Currently we have pretty much full access to the entire suite of broker algos with our top half dozen global counterparties and in that time frame we’ve gone from effectively zero low touch to about 10%-15% of our total execution now being electronic or self-directed in some way at the moment.
PMs involvement in trade orders
It is changing, but it’s changing not so much in terms of getting involved, but actually PM’s getting less involved. If you look at the Australian experience but in a global context, Australia would probably be described as a relationship market more so than the larger markets (particularly UK, Europe and the US). But the sell-side and buy-side are evolving here just as they have in the offshore markets, and the tools that are standard on a global trading desk offshore are now the same as those we enjoy here on the buy-side and the sell-side. Our ability to measure and monitor trading is a lot more quantitative now than it was and that’s pretty much been the key in evolving trading decisions and trading infrastructure.
Changes in application of TCA metrics
We’ve made this very much a priority over the course of the last two years. We now have a strategic partner in ITG to conduct our TCA for us. And I guess what’s changing is how we actually use that analysis in a practical sense both on the trading desks and also within the investment teams. We have come from a relative standing start in terms of having that deep level of analysis of every single trade and now having trade reporting daily proves invaluable not just to traders but to portfolio managers as well.
Data and workflow management
The range of benchmarks that portfolio managers and our clients are interested in looking at has definitely been evolving and converging to the implementation shortfall benchmark which we view as the real cost of trading. From a data and workflow management point of view this can sometimes pose a challenge to properly capture the unrealised costs when an order is cancelled before it is fully executed or conversely when an order is cancelled and re-instated shortly afterwards. We have made good progress, working with ITG to properly link orders to reflect the real implementation shortfall in these circumstances. As large investors, especially in our home market, VWAP is also still relevant and — though a much maligned benchmark — is still a good pointer to the optimal times of the day to be trading.
Dark pools debate and the fragmentation in Australia and the HFT conversations in light of ASIC regulation
It is interesting and pleasing that ASIC see themselves as thought leaders in this space in terms of appropriate regulation of HFT and dark pools. I think ASIC are asking the right questions and trying to address genuine concerns and perceptions of misbehaviour in a productive and consultative way. Recent statements suggest that they are also reasonably pragmatic in some of their findings in particular with some of the fees they’re looking at, minimum resting times and minimum size in dark pools, etc. They are quite willing to rely upon evidence rather than making a statement of intent and they seem happy to continue to play a look-and-see role. I think other initiatives have been good too in terms of kill switches to maintain orderly markets and — more recently — mandatory price improvement for trading in the dark. I think it will be interesting to see how these play out in terms of overall participation in dark pools but I think the general intentions are good. I do find an increasing amount of my time is spent on global regulation. We do try to adhere to the highest global benchmark when it comes to actual specifics of what’s permissible and best practice in individual markets; it’s the responsibility of our respective trading desks to make sure that happens. I am pleased to see ASIC taking a leadership role globally and would point to ASIC’s Greg Medcraft becoming Chair of IOSCO as an example. It is in everyone’s interest that regulators talk to each other and seek to standardise their procedures.
Lessons to be learnt from equities
I do think that the electronification of the equities markets and the ability to gather and analyse data has made a genuine difference to our knowledge and understanding. What we know now about the costs of trading and the real cost to a portfolio of trading activity, both before, during and after trade, is streets ahead of what we knew a decade ago. We are now moving forward very quickly in terms of, say, futures markets because we can capture prices and we don’t have the issue of fragmentation in those markets, so we can get a pretty reliable consolidated tape to conduct the same analysis. And in FX markets we are closer to being able to capture big data in a more accurate manner and if that pushes forward into the fixed income space, there will be much to learn in terms of the real costs of our activities. This will all have a bearing on investment decisions.
Evolution of the client
Yes, very much so and I think particularly we are near the end of that period where they have feared HFT — “who are they”, “what are they doing” etc? There is now a better understanding of who they are, what they do, how they operate in a way that there never used to be. And, similarly, dark liquidity carried with it this connotation of evil but the understanding now is that actually it’s a place to trade and what might be of more concern is what goes on at that place rather than the venue itself.