Sunday 7th February 2016
NEWS TICKER: Friday, February 5th: According to Reuters, Venezuela's central bank has begun negotiations with Deutsche Bank AG to carry out gold swaps to improve the liquidity of its foreign reserves as it faces debt payments of some $9.5bn this year. Around 64% of Venezuela's $15.4bn reserves are held in gold bars, which in this fluid market impedes the central bank's ability to mobilise hard currency for imports or debt service. We called the central bank to confirm the story, but press spokesmen would not comment - The Hong Kong Monetary Authority (HKMA) says official foreign currency reserves stood at $357bn (equivalent to seven times the currency in circulation or 48% of Hong Kong M3) as at the end of January, down compared with reserve assets of $358.8bn in December. There were no unsettled foreign exchange contracts at month end (end-December: $0.1bn) - BNP Paribas today set out plans to cut investment banking costs by 12% by 2019 to bolster profitability and reassure investors about the quality of its capital buffers. The bank is the latest in a line of leading financial institutions, including Credit Suisse, Barclays and Deutsche Bank which look to be moving away from capital intensive activities. BNP Paribas has been selling non-core assets and cutting back on operations including oil and gas financing for the last few years as it looks to achieve a target of 10% return on equity. Last year the bank announced a €900m write-down on its BNL unit in Italy, which pushed down Q4 net income down 51.7% to €665m - Johannesburg Stock Exchange (JSE)-listed tech company, Huge Group, will move its listing from the Alternative Exchange (AltX) to the JSE main board on March 1st - Moody's says it has assigned Aaa backed senior unsecured local-currency ratings to a drawdown under export credit provider Oesterreichische Kontrollbank's (OKB) (P)Aaa-rated backed senior unsecured MTN program. The outlook is negative in line with the negative outlook assigned to the Aaa ratings of the Republic of Austria, which guarantees OKB’s liabilities under the Austrian Export Financing Guarantees Act – As the first phase of talks between Greece and its creditors draws to an end, International Monetary Fund chief Christine Lagarde stressed to journalists in Greece that debt relief is as important as the reforms that creditors are demanding, notably of the pension system. "I have always said that the Greek program has to walk on two legs: one is significant reforms and one is debt relief. If the pension [system] cannot be as significantly and substantially reformed as needed, we could need more debt relief on the other side." Greece's pension system must become sustainable irrespective of any debt relief that creditors may decide to provide, Lagarde said, adding that 10% of gross domestic product into financing the pension system, compared to an average of 2.5% in the EU, is not sustainable. She called for "short-term measures that will make it sustainable in the long term,” but did not outline what those measures might be. According to Eurobank in Athens, IMF mission heads reportedly met this morning with the Minister of Labour, Social Insurance and Social Solidarity, Georgios Katrougalos, before the team is scheduled to leave Athens today. According to the local press, it appears that differences exist between the Greek government and official creditors on the planned overhaul of the social security pension system. Provided that things go as planned, the heads are reportedly expected to return by mid-February with a view to completing the review by month end, or at worst early March. In its Winter 2016 Economic Forecast published yesterday, the European Commission revised higher Greece’s GDP growth forecast for 2015 and 2016 to 0.0% and -0.7%, respectively, from -1.4% and 1.-3% previously - Fitch says that The Bank of Italy's (BoI) recent designation of three banks as 'other systemically important institutions' (O-SIIs) has no impact on its ratings of the relevant mortgage covered bond (Obbligazioni Bancarie Garantite or OBG) programmes. Last month, BoI identified UniCredit, Intesa Sanpaolo. and Banca Monte dei Paschi di Siena as Italian O-SIIs. Banco Popolare and Mediobanca have not been designated O-SIIs. This status is the equivalent of domestic systemically important bank status under EU legislation. Fitch rates two OBG programmes issued by UC and one issued by BMPS, which incorporates a one-notch Issuer Default Rating (IDR) uplift above the banks' IDRs. The uplift can be assigned if covered bonds are exempt from bail-in, as is the case with OBG programmes under Italy's resolution regime and in this instance takes account of the issuers' importance in the Italian banking sector – Meantime, according to local press reports, Italian hotel group Bauer and special opportunity fund Blue Skye Investment Group report they have completed the rescheduling and refinancing of Bauer’s €110m debt through the issue of new bonds and the sale of non-core assets, such as the farming business Aziende Agricole Bennati, whose sale has already been agreed, the Palladio Hotel & Spa and a luxury residence Villa F in Venice’s Giudecca island – Meantime, Russian coal and steel producer Mechel has also agreed a restructuring of its debt with credits after two intense years of talks. The mining company, is controlled by businessman Igor Zyuzin - Asian markets had a mixed day, coming under pressure. Dollar strengthening worries investors in Asia; from today’s trading it looks like dollar weakening does as well. Actually, that’s not the issue, the dollar has appreciated steadily over the last year as buyers anticipated Fed tightening; but it has hurt US exports and that has contributed to investor nervousness over the past few weeks, which is why everyone is hanging on today’s The nonfarm payrolls report, a bellwether of change – good or bad in the American economic outlook. Back to Asia. The Nikkei 225 ended the day at 16819.15, down 225.40 points, or 1.32%; and as the stock market fell the yen continued to strengthen. The Nikkei has shed 5.85% this week. The dollar-yen pair fell to the 116-handle, at 116.82 in afternoon trade; earlier this week, the pair was trading above 120. It is a hard lesson for the central bank, whose efforts to take the heat out of the yen by introducing negative interest rates has done nothing of the sort. Australia's ASX 200 closed down 4.15 points, or 0.08% after something of a mixed week. The index closed at 4976.20, with the financial sector taking most of the heat today, with the sector down 0.7%. In contrast, energy and materials sectors finished in positive territory, buoyed by gains in commodities. The Hang Seng Index closed at 19288.17, up 105.08 points (or 0.55%) while the Shanghai Composite was down 0.61%. down 17.07 points to 2763.95. The Shenzhen composite dropped 20.36 points (1.15%) to 1750.70, while the Kospi rose marginally by 0.08% to 1917.79. Today is the last day of trading on the Chinese exchanges for a week.

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Execution consulting - up close and personal

Thursday, 19 April 2012
Execution consulting - up close and personal Many commentators agree: execution consulting is the best way for fund managers to receive low-touch (automated) trading with high-touch (personal) service from their broker-dealers. For some broker-dealers it means advising clients on how to execute their orders, including which trading venues to use, when to trade and how much to trade. They will also execute the order, if asked. For others, it means direct contact with the portfolio manager (PM) and becoming one element in the PM’s search for returns. Ruth Hughes Liley reports on the key trends. http://www.ftseglobalmarkets.com/media/k2/items/cache/83ece112ec70792cd12dae2d991597dc_XL.jpg

Many commentators agree: execution consulting is the best way for fund managers to receive low-touch (automated) trading with high-touch (personal) service from their broker-dealers. For some broker-dealers it means advising clients on how to execute their orders, including which trading venues to use, when to trade and how much to trade. They will also execute the order, if asked. For others, it means direct contact with the portfolio manager (PM) and becoming one element in the PM’s search for returns. Ruth Hughes Liley reports on the key trends.

In a high touch, no touch trading world—giving you the best of both,” reads the Equity Execution Services section of the website of Bank of America Merrill Lynch. Indeed, in a world where almost all trades are executed electronically, execution consultants have been carving out a niche role over the past three years as low volumes, sometimes high volatility and increasing regulation occur alongside more and more complex technology.

James NoserJames Noser, president, Abel Noser Solutions ­execution consultancy“It’s an extremely competitive landscape out there and with transaction costs a major source of underperformance, if costs or slippage can be improved and you can scrape up pennies, then it is valuable,” says James Noser, president, Abel Noser Solutions execution consultancy.  “It’s very difficult for customers to distinguish between different execution providers, but as a broker, if you have a transaction cost analysis (TCA) capability, you have an advantage as you have something to prove best execution.”



An industry consortium Open TCA was formed in October 2011 including ­TradingScreen, Bank of America Merrill Lynch, Citi, Nomura and UBS, to set guidelines for developing consistent, industry-wide standards for TCA. However, in a report in December 2011 it showed that TCA users ranked their providers only 5.36 out of ten, showing, says the report, that “providers have work to do to meet today’s expectations, let alone a more demanding future requirement set.”

Execution consulting covers a spectrum of services to clients. At one end is full TCA, where consultants sit down with clients and make a detailed analysis based on historical data of a client’s trading patterns—what Noser calls ‘micro focus’—and then provide detailed reports to advise on strategy. At the other end, firms are merging their high touch and low touch teams to the benefit of both.

Aiming to do just that, Nomura has pulled its sales trading team on to the electronic desk and Adam Toms, co-global head of electronic trading, says: “Clients need that help. They have quite specific needs and have evolved their own style of trading. If a client passes a cash-worked order ticket to a desk for execution, the cash trader brings a high degree of colour and specialis­ation to an order. These are important elements that can be more limited if a client executes orders electronically themselves so we aim to bridge that gap depending on client needs.”

Suggesting ways to improve implementation and performance and running monthly detailed aggregated analysis of all trades among things, Toms says they are able to build a detailed picture for discussion with the client and have reduced price slippage—the difference between a trade’s starting execution price and its final price—for some clients by as much as 50%.

Goldman Sachs conducts ‘structured ­experiments’ to enable clients to test a different algorithm. George Sofianos, head of execution strategies, Goldman Sachs Electronic Trading, says, “As the client sends us flow we have a randomiser on our side. We let the experiment run as long as is needed to get enough data. We then do the post-trade analysis and compare the two strategies and advise clients accordingly.”

Analysis as a differentiator

With the requirement for brokers to provide best execution snapping at the sell side’s heels, analysis can be an important differentiator. A Greenwich Associates report last year found that investment managers who regularly collect feedback from clients had stronger client relationships.

Brian GallagherBrian Gallagher, head of European Electronic ­Trading, Morgan StanleyBrian Gallagher, head of European electronic trading, at Morgan Stanley, points out that there is a world of difference between how firms operated before the financial crisis in 2008 and now. “In 2007, people viewed electronic trading as IT: ‘go in, plug in DMA and away we go’. Now the role of the people covering accounts is totally different. Their job is to help their clients, especially as some buy side firms are mandating that their traders trade electronically.”

“These days with the amount of fragmentation, liquidity and sophistication of products, electronic trading is in no sense a low-touch business,” agrees Andrew Morgan, European head of equities for Autobahn, Deutsche Bank’s electronic trading platform. “We actively advise on regulation and policy in order to guide clients through changing market structure as well as providing real time execution advice on the use of different products. We continuously engage with buy side heads of dealing on matters such as accessing markets, different liquidity experiences and the relative merits of trading across different venues. It has become a very involved process.”

Interestingly, Morgan says while it might be expected that high frequency trading clients would have the least day-to-day dialogue, it is not the case: “They have many of the same challenges as traditional firms, so we are also talking about their needs and engineering a solution for them based on their style of trading.”

Andrew Herriot, who runs a team of five execution consultants at European agency broker CA Cheuvreux says: “We are seeing clients asking for great granularity on order analysis before, after and during trading and so we have to be closer and more ­responsive to the clients’ needs in order to customise our offering.”

Indeed, there is a new level of sophistication among some hedge fund and asset managers who may have come from the ranks of larger institutions, agrees Erik Schlesinger, senior vice president, global product strategy at ConvergEx’s Real Tick. “They are looking for a broker neutral ­independent platform. They have had access to their own suite of tools for years and have developed their own policies and procedures to reduce trade costs and capture alpha. TCA and execution ­con­sulting reducing fragmented pro­-cesses and tying together the entire trade life-cycle—from portfolio manager to the trader and the execution venue.”

With respect to how comfortable clients are that high and low touch trading are moving together, Laurie Berke, a principal with research firm TABB Group, has noticed a big change between buy side acceptance of this between 2010 and 2011. “In the early days of low touch it was all about anonymity. Now we have found traders who think that better integration between high and low touch, under certain circumstances may very well be a good thing.”

Erik SchlesingerErik Schlesinger, senior vice president, global product strategy at ConvergEx’s Real TickAt UBS, Charles Susi, global co-head of direct execution, says: “It’s still important to maintain information barriers so while there can be more transparency about how things are traded, we need to appropriately protect confidentiality. I am surprised how the conversation has moved from the old days of a client wanting transaction cost analysis reports at the end of the day or monthly, to now, when they ask detailed questions as an order progresses about how an algo operates, what kind of liquidity is available and so on. Clients understand that high touch desks use electronic tools for execution, so we have to ensure our high touch desks can answer these questions, not just the algorithmic trading desk.”

All of UBS’s execution teams have been trained in giving detailed advice to clients. There are informal bi-weekly teach-ins for the teams about how algorithms work, different venues and explanatory summaries of pages of data, for example.

Observers point out a difference between the sales desk team who are knowledgeable about which stocks to trade and the algorithm desk, where quants understand the behavioural nuances of each of their firm’s algorithms.

It is no easy job. Bloomberg Tradebook is training all its 32 cross-asset class execution consultants in 15 accredited courses, from professional consulting through to technical analysis. Completed in the US, it is being rolled out to Europe and Asia this year and will be made available to Bloomberg Tradebook clients.

Robert Shapiro, global head of trading and execution consulting, Bloomberg Tradebook, says his consultants are measured and compensated by how well their clients use Bloomberg Tradebook functionality. “By holding our execution consultants ­accountable, we make sure they are aware of the tools the clients are using,” he says.

As algorithms drive through into derivatives, including options, futures and foreign exchange, Shapiro says: “We’ve moved from ‘execution only’ to ‘execution everything’. Execution consulting is the service aspect, the human being element integrated into electronic trading.”
Morgan Stanley’s Gallagher points out that at its core, execution consulting is about education. “Some clients have a long learning curve in using algos, others are not so ­comfortable and our job is to help them understand. On the sell side, we sit in a good front row seat. Every day we are dealing with MTFs, dark pools, how spreads are moving. ”

His comments come hot on the heels of three seminars arranged for clients by Morgan Stanley in Amsterdam, Stockholm and London. Attracting around 10 clients to each, Gallagher says they are invaluable in building a relationship with clients who trade electronically. They attract a mix of traders from long-only to the more sophisticated stat arb firms and the seminars allow clients to hear how their peer groups are trading differently. It creates a forum of best practice.

Robert ShapiroRobert Shapiro, global head of trading and execution consulting, Bloomberg TradebookIndeed, as the buy side has evolved and takes an increasing amount of control over the detail of its own trading strategies, it is they who are driving how algorithms are built. UBS, for example, developed its latest global algorithm Swoop, in response to feedback from clients that they needed a non-schedule based strategy that would seek harder-to-find liquidity opportunistically without leaving a footprint.

Last year Abel Noser brought out a trading strategy, Managers’ Styles, based on a particular portfolio manager’s trading style. It builds on their customisable Signature Algorithms brought out in 2010. More recently in January 2012, Abel Noser Solutions partnered with Convergex to offer advanced TCA software and execution consulting to customers of ConvergEx’s Real Tick electronic trading platform.

“We took trading cost analysis and gleaned from it how individual portfolio managers implement their trades and you need good TCA to be able to do that,” says Bill Conlin, President and CEO of Abel Noser, whose TCA offering, ranked leader in three out of four categories last year by Greenwich Associates, includes more than 130 pre-set measures covering the full trading cycle from portfolio manager to trader to execution venue.

Conlin says: “What the buy side wants is a consistent report that keeps up with the latest technologies and gives them a clear picture as to how they trade. They want it to be an intelligent product. Now you have high frequency trading out there, new algos, new dark pools. You have new ‘bad guys’ on the other side of your trade all the time, so TCA is more important than ever.”

He believes that figuring out a client’s concerns is dependent on the client disclosing enough information for the firm to create a picture on which they can base good advice and he says many investment banks are not best placed to provide this, given that clients will not give all their orders to one bank.

Nonetheless, UBS’s Chris McConville, head of EMEA Electronic Sales Trading, says: “I suppose it would be easier to say ‘just trust me’ but you have to be able to prove you are transparent. It is always better that we are partners with a client. In terms of strategy customisation, it works best when clients work with us in order to ensure we deliver the right solution and can tailor the appropriate parameters. The partnerships that are the most successful are the ones where the client opens up.”

Gallagher concludes: “It comes down to knowing your client. The second thing is knowing about the way the market structure is changing from a regulatory level. It’s also about knowing your product. It’s not about better algorithms; it’s about better use of algos. If you don’t have the right strategy, it doesn’t matter what algos you apply.” n

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