K&KGC caught up with Derek McCole, to get his perspectives, after he spent just over a year in his new global co-head trader role in Edinburgh transitioning from Singapore as the previous “Head of Equity Dealing ‐ Asia Pacific” at Aberdeen Standard Investments. As expected, Derek gave us interesting insights into the transition of roles between the vastly different regions and a clear perspective of the challenges ahead.
The new global role
We have a multi-asset desk in Asia, with multi-asset experience. Having been away from the UK for 5 years there was certainly a need to get back up to speed with the UK and the European capital markets which have changed drastically with the regulatory changes from 2011-2016.
In a global role, you need to streamline processes and procedures and encourage consistency across the globe as much as possible. Inevitably there are some regions where this is not possible, where local jurisdictions and regulations dictate that you have to do some things in a certain way. For example, we have to have locally based traders on the ground in Jakarta and Taiwan due to regulatory requirements. These types of local nuances mean that you cannot centralise everything as local regulation takes priority.
Working in Asia
One thing I liked in my previous regional role was the opportunity to be involved in different asset classes. I enjoyed my responsibility in Asia because the markets are so varied across jurisdictions with different ways of trading, several ways of sourcing block liquidity and the different network of brokers you had to build up in each area. From a lifestyle perspective, the trading community is very close-knit in Singapore across both buy side and sell side. There was a lot of interaction between everyone as the community was relatively small and there was an opportunity to meet up regularly and discuss the hot topics. I certainly enjoyed the closeness of the industry in Singapore.
Working in a regional responsibility out of Asia, one may easily dismiss regulatory obligations in other parts of the globe singling them out as not being relevant, but ultimately they affect everyone to some degree. There is definitely a need to stay involved and informed about the relevance and impact at an early stage, particularly as part of a global firm which generally looks to adopt the highest standard of regulation across the globe.
Given Asia is fragmented and multifaceted, one challenge I encountered early on was the need to build so many relationships across the region. A global bulge bracket bank could potentially have 10 – 12 points of contact; one in each country, one electronic contact, one for program trades and one ECM person. It was hard to manage as it takes time to build up all of these relationships. Where possible we worked on streamlining relationships, while not attempting to achieve one-stop-shops, but rather having single points of contact per region covering South East Asia, North Asia, etc. This was a more practical solution though still not as easy to implement as it may sound. The added value, knowledge and expertise of local broker relationships in specific areas can sometimes be justified if you are active in that area.
Technology enables people
Electronic trading is often an enabler for the high touch trader so they can focus their attention on those trades where they can add more value. The specialist type of orders that require more care and attention from a liquidity perspective is where we as traders can add significant value. Referring back to my comparisons vs. Asia, more man power is generally required in Asia as there is less electronic trading available. The traders in Asia are instrumental in the process of sourcing block liquidity given electronic trading is not as mature.
An algo-wheel solution is an area of priority as it can automate the more liquid trades, and remove any routing bias in the broker selection process.
However, the traders on the desk still need to be competent at both low and high touch trading. I don’t think it is wise to pigeon hole traders as purely electronic, mid/small cap or by market coverage. Whilst core specialisation should be maintained, generalisation is a positive and provides individuals with the opportunity to trade other markets as well. 80% of a trader’s time could for example be spent on their specialist area and 20% in other markets.
Another interesting area is Execution Management Systems (EMS), which can enable aggregation of orders from multiple Order Management Systems (OMS), help in the implementation of new concepts such as algo-wheels and provide access to algorithmic tools from multiple vendors. An EMS solution could potentially benefit traders across all asset classes within the firm.
A liquidity perspective post MiFID II and partner relationships
Post MiFID II, the 4% and 8% double volume caps will encourage orders to be over the Large in Scale (LIS) threshold. There is a possibility that the majority of FTSE 100 stocks will be capped as of day one, for example (i.e. the shares are not tradeable in the dark unless they exceed the LIS threshold). I am comfortable with the concept of larger blocks being placed in the dark as there is a risk that smaller average trade sizes only serve to increase the risk of information leakage. Electronic crossing networks and Periodic Auctions look set to benefit as a result.
With the risk of further fragmentation, the buy side needs to identify the venues which it believes will gain a critical mass and be around for the long haul.
We are closely monitoring the progress of the Systematic Internaliser (SI) regime and we envisage most large investment banks gaining SI status and providing liquidity from their risk books. The second type of SI will be the Electronic Liquidity Providers (ELP) but it appears very few buy-side firms are likely to want to interact with this flow from the outset. Many firms are adopting a wait-and-see approach before committing to interacting with SIs. It could take some time before the market settles down to what will be the new norm in 2018. During this transitional period it will be vital for the buy side to remain flexible, evaluating each source of liquidity on its merits. At this stage, we are not closing our doors to anything. The market will ultimately always adapt.
We generally look to streamline the broker list where at all possible. There may be a gradual consolidation of brokers post MiFID II, and it will be interesting to see if liquidity in more specialist areas such as small/mid cap and emerging markets suffers if the breadth of research declines. There will always be a need for a tail of specialist brokers but the natural progression will probably still be towards a consolidation of brokers over time.
As of January 2018, we will be paying for all investment research via our own P&L, with research decisions being completely segregated from the dealing desk.
We will not know which counterparties the fund managers are paying for research to ensure there are no possibilities of cross-subsidisation. Similarly, the fund managers will not be able to see our execution commission either. The US Securities and Exchange Commission’s (SEC) recent measures to allow a 30-month grace period for brokers to accept hard dollar payments for research without being registered as an investment advisor has been a help in this regard.
Challenges and opportunities with MiFID II
MiFID II has undoubtedly consumed a lot of resource amongst the buy-side and sell-side. Regarding trade reporting for example, whilst in reality only a small proportion of trades are going to have to be reported by the buy-side, with trading counterparties often being the reporting party, the infrastructure still has to be in place to be able to report everything. The reporting requirements have been one of the largest MiFID II related challenges for the buy-side community.
Ultimately the increased regulation will bring more transparency to the marketplace, which can only be a good thing, though it may take some time before the benefits become apparent. The unbundling of investment research from dealing commissions is likely to be one of the major changes in that regard, hopefully thereby providing a clear benefit to the end client.