Sailing into a new and exciting market structure with more data and closer sell-side relationships
Managing a global trading desk and adapting to local nuances
Investec Asset Management was founded in South Africa in 1991. Since then the firm has been built from start-up into an international business managing more than $141 billion on behalf of third party clients. The acquisition of Guinness Flight Hambro Asset Management in London in 1998 provided the firm with a platform from which to access global markets.
I am responsible for equity trading in global markets with the exception of Africa and the Middle East region which are managed by our trading desk in Cape Town. In the London team, we cover Pan Europe, Asia and the Americas. Trading strategies applied to Pan European markets can often be broadly similar. The Asian markets however are more unique in their own right so accessing liquidity is a stand-alone process where no one size fits all. Taiwan, Korea and Hong Kong, for example, all have different regulatory structures that require engagement in different ways; not all of them have closing auctions for example and some regions require client identification prior to trading in order to meet local regulations. We trade regularly in multiple Asian markets which requires a deep knowledge in each market.
The U.S. market offers many different liquidity venues but the reality is that most is accessed from just a handful. I think it is fair to say that electronic trading is more mature in the U.S. than anywhere else right now.
We have been very lucky to have an extremely hard working and dedicated trader in our Hong Kong office who has been part of my team for about seven years. We are currently looking to add to the headcount there in order to increase our fixed income trading capacity.
Data, the importance of standardising the use of FIX tags and evolving Transaction Cost Analysis
We use Bloomberg’s BTCA product to help analyse our equity data. We have had it for just over two years now and are constantly trying to increase and improve on the data that we feed it in order to obtain the best and most meaningful results we can. The increased trade and transaction reporting transparency requirements under MiFID II have helped push this data enrichment process particularly now brokers are populating FIX tags such as 29, 30 & 851.
Amongst the many FIX tags that can be used, some counterparties are supplying more in-depth data with regards to how an order is being executed and giving us more granular details. An example would be where sell side counterparties are providing more detail around liquidity provided from the ELP, SI and/or CRB where some would amalgamate this into one high level proprietary type feed, others will break it down to give more transparency. Over time, I think there will be a more standard consistency across the industry FIX tags. We are trying to dig down in to the data that is being provided to us by all of our counterparties to determine what the additional data being provided means and how it is best linked to our TCA product to make it more meaningful. The biggest challenge is, how best we can use this data to our clients’ best execution advantage, a challenge that many of our peers are grappling with too.
Within Equities there are an increasing number of TCA providers coming up with smarter ways to analyse data. Some of these developments are for example to analyse the trading lifecycle in a slightly different way. It is always useful to have a choice around how the data is analysed and how it is presented as this area continuously evolves. It is in our interest to be cognisant of what various features the providers can offer us.
There is a need to get smarter on how data is mapped back to systems which in turn will allow you to make more informed decisions on whether the strategies taken are positive or negative. You can also look at reversion statistics, how much liquidity was obtained and over what time period. I foresee as time goes on, with the development of richer data, the buy side will become more informed and allow us to make even better execution decisions.
Trying to develop a standard industry process around TCA though is a very challenging task given how different each asset managers investment strategies and system workflows are. We for example have equity workflows running through an OMS as well as an EMS whereas others may just use one system.
Enhanced collaboration with the investment team
Our global equity investment teams are long-only active investors. Once an investment decision is made it is the job of the trader to perform a thorough pre-trade analysis and manage the fund manager’s expectations over ease of execution and keep them in touch with trading strategies employed. Clear communication is the key here together with good post-trade feedback. We are therefore also thinking about how best to present meaningful post-trade data in order to compliment the overall execution process. You need to think way beyond a simple VWAP analysis.
Improved buy- and sell-side relationships
Our overall relationship with our sell-side counterparties is today the best it has ever been. They have developed into trusted relationships where some of the old market opaqueness has now become much more transparent and old barriers broken down. Sell-side execution services have moved on with the times and many offer first-class products and services that really do help the buy-side trader achieve their best execution role. Execution venue data is also now much more easily accessible with clear information provided within the FIX tags. Sales traders do still provide a very important role too particularly in accessing block liquidity and also providing a very good all-round trade–related service. The onset of electronic trading has a long way to go before we completely eliminate the human touch!
We run a very large small-cap fund with liquidity access clearly different to that of large-caps. One of the key liquidity sources is often small-cap specialist brokers. With the onset of the new MiFID II rules around different liquidity venues or changes that have been made, there were potentially concerns that some of the small cap relationships would suffer, but we have not seen this. We still maintain very strong relationships with our small cap specialists and accessing liquidity this way still remains invaluable.
Unbundling of research
MiFID II brought the unbundling of research from commission to a head and we, just like the majority of our peers, are paying for research ourselves. The bundling of the two had been a legacy market practice that had to come to an end in the overall best interests of the end investor. This has also brought some challenges to both the buy and the sell-side but will no doubt produce a healthier and more competitive result for all involved as it continues to settle down.
From our trading desk perspective though, the new rules around unbundling has had no effect on our best execution process. From an operational perspective we have now removed the research element of our commission rate structure from our CSA brokers leaving us with a pure execution-only structure. The removal of the administration burden around CSAs was welcomed.
Commissions rates have always been an important focus and are an explicit cost for our clients. Managing commission rates and making sure we get the best deal without compromising any execution quality or liquidity access has always been an important part of our trading role.
There is an increasing focus within the asset management industry over both explicit and implicit costs and charges across all business units and this is also a well-known focus for the FCA this year, who want to ensure any opaque charges become much more transparent.
It does feel like there is now going to be more of a focus around commission rates. There are many different ways to potentially source liquidity across the marketplace, whether it be Lit markets, dark pools, systematic internalisers, block search and discovery etc. and some strategies inevitably attract higher costs than others. Many asset managers pay blended commission rates across all execution services and some are more granular and break down different rates for different services. It will be interesting to see how these explicit charges develop during this year and beyond as I am not sure the long-term answer is a race to zero given all the different options and potential outcomes we have in order to be able to achieve best execution for our clients. We must not lose sight of the possibility of having to pay one basis point more in order to save multiples of that in implicit costs. One of the biggest challenges the buy-side trader faces is trying to keep market impact to a minimum; an implicit cost that can easily reach multiples of explicit charges. With access to liquidity in equity markets being so fragmented it is essential that the buy-side trader has the ability to assess which are most suited for their best execution process and then also have the ability to engage with that venue.
RTS 28 top five reporting requirements on venues and execution counterparties.
We have made some very good progress with this project where we are now on the home run for all the financial instruments we trade, both from a qualitative and quantitative perspective. As this is the first time for everybody, reporting on 2017 data, there will no doubt be some teething problems and also a potential for varying interpretations of the obligations. One of the most confusing points appears to be the identification of the trading venue and when that is a broker or an actual venue.
For our trade reporting we are using Trax which has been a real win for us as it covers our trade reporting obligations across all asset classes. A very solid choice if the first few weeks are anything to go by.
MiFID I was largely about equities and MiFID II largely about trying to bring transparency around many other financial instruments. Honouring our fixed income obligations were by far the most challenging for us and no doubt most of our peers too. Our head of fixed income trading and the MiFID II project team have done a fantastic job in bringing our fixed income trading activity in to the MiFID II world. Bringing financial instruments into new venue trading environments has been a very big data and connectivity challenge, one I have to say was looking pretty daunting this time last year but we have managed to complete the challenge and I have no doubt this hard work will pay off in the form of a more efficient investment environment for all investors.