Sunday 1st February 2015
NEWS TICKER FRIDAY, JANUARY 30TH: Morningstar has moved the Morningstar Analyst Rating™ of the Fidelity Japan fund to Neutral. The fund was previously Under Review due to a change in management. Prior to being placed Under Review, the fund was rated Neutral. Management of the fund has passed to Hiroyuki Ito - a proven Japanese equity manager, says Morningstar. Ito recently joined Fidelity from Goldman Sachs, where he successfully ran a Japanese equity fund which was positively rated by Morningstar. “At Fidelity, the manager is backed by a large and reasonably experienced analyst team, who enjoy excellent access to senior company management. While we value Mr Ito’s long experience, we are mindful that he may need some further time to establish effective working relationships with the large team of analysts and develop a suitable way of utilising this valuable resource,” says the Morningstar release - The Federal Deposit Insurance Corporation (FDIC) today released a list of orders of administrative enforcement actions taken against banks and individuals in December. No administrative hearings are scheduled for February 2015. The FDIC issued a total of 53 orders and one notice. The orders included: five consent orders; 13 removal and prohibition orders; 11 section 19 orders; 15 civil money penalty; nine orders terminating consent orders and cease and desist orders; and one notice. More details are available on its website - Moody's Investors Service has completed a performance review of the UK non-conforming Residential Mortgage Backed Securities (RMBS) portfolio. The review shows that the performance of the portfolio has improved as a result of domestic recovery, increasing house prices and continued low interest-rates. Post-2009, the low interest rate environment has benefitted non-conforming borrowers, a market segment resilient to the moderate interest rate rise. Moody's also notes that UK non-conforming RMBS exposure to interest-only (IO) loans has recently diminished as the majority of such loans repaid or refinanced ahead of their maturity date - The London office of Deutsche Bank is being investigated by the Financial Conduct Authority (FCA), according to The Times newspaper. Allegedly, the bank has been placed under ‘enhanced supervision’ by the FCA amid concerns about governance and regulatory controls at the bank. The enhanced supervision order was taken out some months ago, says the report, however it has only just been made public - According to Reuters, London Stock Exchange Group will put Russell Investments on the block next month, after purchasing it last year. LSE reportedly wants $1.4bn - Legg Mason, Inc. has reported net income of $77m for Q3 fiscal 2014, compared with $4.9m in the previous quarter, and net income of $81.7m over the period. In the prior quarter, Legg Mason completed a debt refinancing that resulted in a $107.1m pre-tax charge. Adjusted income for Q3 fiscal was $113.1m compared to $40.6m in the previous quarter and $124.6m in Q3 fiscal. For the current quarter, operating revenues were $719.0m, up 2% from $703.9m in the prior quarter, and were relatively flat compared to $720.1m in Q3 fiscal. Operating expenses were $599.6m, up 5% from $573.5m in the prior quarter, and were relatively flat compared to $598.4min Q3 of fiscal 2014. Assets under management were $709.1bn as the end of December, up 4% from $679.5bn as of December 31, 2013. The Legg Mason board of directors says it has approved a new share repurchase authorisation for up to $1bn of common stock and declared a quarterly cash dividend on its common stock in the amount of $0.16 per share. - The EUR faces a couple of major releases today, says Clear Treasury LLP, and while the single currency has traded higher through the week, the prospect of €60bn per month in QE will likely keep the euro at a low ebb. The bigger picture hasn’t changed, yesterday’s run of German data was worse than expected with year on year inflation declining to -.5% (EU harmonised level). Despite the weak reading the EUR was unperturbed - The Singapore Exchange (SGX) is providing more information to companies and investors in a new comprehensive disclosure guide. Companies wanting clarity on specific principles and guidelines on corporate governance can look to the guide, which has been laid out in a question-and-answer format. SGX said listed companies are encouraged to include the new disclosure guide in their annual reports and comply with the 2012 Code of Corporate Governance, and will have to explain any deviations in their reporting collateral. - Cordea Savills on behalf of its European Commercial Fund has sold Camomile Court, 23 Camomile Street, London for £47.97mto a French pension fund, which has entrusted a real estate mandate to AXA Real Estate. The European Commercial Fund completed its initial investment phase in 2014 at total investment volume of more than €750m invested in 20 properties. Active Asset Management in order to secure a stable distribution of circa 5% a year. which has been achieved since inception of the fund is the main focus of the Fund Management now. Gerhard Lehner, head of portfolio management, Germany, at Cordea Savills says “With the sale of this property the fund is realising a value gain of more than 40%. This is the fruit of active Asset Management but does also anticipate future rental growth perspectives. For the reinvestment of the returned equity we have already identified suitable core office properties.” Meantime, Kiran Patel, chief investment officer at Cordea Savills adds: “The sale of Camomile Court adds to the £370m portfolio disposal early in the year. Together with a number of other asset sales, our total UK transaction activity since January stands at £450m. At this stage of the cycle, we believe there is merit in banking performance and taking advantage of some of the strong demand for assets in the market.” - US bourses closed higher last night thanks to much stronger Jobless Claims data (14yr low) which outweighed mixed earnings results. Overnight, Asian bourses taken positive lead from US, even as Bank of Japan data shows that inflation is still falling, consumption in shrinking and manufacturing output is just under expectations. According to Michael van Dulken at Accendo Markets, “Japan’s Nikkei [has been] helped by existing stimulus and weaker JPY. In Australia, the ASX higher as the AUD weakened following producer price inflation adding to expectations of an interest rate cut by the RBA, following other central banks recently reacting to low inflation. Chinese shares down again ahead of a manufacturing report.” - Natixis has just announced the closing of the debt financing for Seabras-1, a new subsea fiber optic cable system between the commercial and financial centers of Brazil and the United States. The global amount of debt at approximately $270m was provided on a fully-underwritten basis by Natixis -

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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