Friday 6th May 2016
NEWS TICKER: NEWS TICKER: Generali Real Estate has acknowledged the resignation of Christian Delaire from his role as Chief Executive Officer and General Manager of the company. With immediate effect, the firm’s board has appointed Francesco Benvenuti as interim general manager. Benvenuti, who also holds the position of group investments chief operating officer within Group Investment Management, will retain his current role - INFRASTRUCTURE INVESTMENT - Infracapital, the infrastructure investment arm of M&G Investments, has made an agreement to acquire an 80% stake in a Private Public Partnership (PPP) portfolio from Società' Italiana Per Condotte d'Acqua SpA (Condotte), the third largest construction company in Italy. The portfolio comprises both operational and greenfield assets that will provide core public services in the health, transport and security sectors. The portfolio, with a total capital value of over €700m, has an attractive risk-return profile, providing institutional investors with predictable cash flows for over 20 years. Italy is one of the largest PPP markets in Europe and offers numerous opportunities in the social infrastructure space. Andy Matthews, greenfield director, Infracapital, says: “This transaction provides Infracapital with a high-quality platform of PPP projects in Italy, a country which has successfully embraced the PPP model and offers numerous opportunities in the social infrastructure space —TURKEY After a generally benign April, when it looked as if emerging markets had turned a corner May has come in like a lion and once again (in aggregate) the segment has fallen in six straight sessions. Turkey is on the brink of a constitutional battle, which no doubt will be won by President Tayyip Erdogan, who wants to create a lifelong executive presidency. Investors are not crazy about the idea, the upshot being that S&P will likely cut Turkey's rating at least one notch deeper into junk later on Friday. The lira is set to end the week around 4.3% weaker against the dollar. The stock market was down 0.9% today and is on course for the biggest weekly drop since June 2013, with losses of over 8%. Local 10-year bond yields remain at one-month highs while Turkish five-year credit default swaps (CDS) are at 269 basis points (bps), hovering near a two-month high according to Markit. It is also unlikely that Europe will look upon Erdogan’s insistence on dominating all parts of Turkish economic and political decision making. Certainly it has proved too much for Turkey’s moderate prime minister Ahmet Davutoglu, who says he now wants to stand down at the upcoming AK Party congress later this month; though it is likely he was pushed into the decision as the president stripped the premiership of much of its power and authority. The resignation means Erdogan has tightened his control of Turkey and is likely to install a more obedient prime minister. It will weigh heavily on European legislators who are already ambivalent about bringing the country closer into the European fold. Erdogan has timed his move to dominate Turkish polity well: the country is dealing with a number of rising problems, including a resurgent conflict with the Kurdistan Workers’ Party (PKK), bombings by extreme Islamic groups and the influx of more than two and half million migrants and refugees. Davutoglu had led talks with Europe to limit the number of refugees flowing across its border in return for accelerated EU accession talks and financial aid. That stance reportedly did not gel with the president who wants a more fluid relationship with Europe; so it will be interesting to see what happens now. —EM TRADING SESSION – Australia’s ASX All Ordinaries was up a marginal 0.26% today, the only index that did not take a hammering today. The Shanghai Composite fell 2.82%, its biggest one-day fall in more than two months as investors began to worry about the country’s growth prospects again. The Hang Seng fell 1.66%, while India’s Sensex was down 0.13%. The Japanese market fell 0.25%, not great, but not the hammering the market has taken in recent days. The Taiwan TSEC50 was also down 0.26%. Russian dollar-denominated stocks slipped 1.3% and South African stocks lost 0.7%. Russian rouble and Kazakh tenge losing 0.5% and the South African rand down 0.3%. Kazakhstan's central bank cut its main policy rate to 15% (FROM 17%) yesterday explaining the move as easing pressure on the tenge and lower inflation risks. Emerging markets FX and index losses are attributed to weak commodity markets, with copper set for its largest weekly loss since early 2015, and a plunge in steel and ore prices. The reality is though that while investors keep pushing for ever looser central bank policy on interest rates it is not actually helping growth anywhere, nor is it encouraging inflation. A change in thinking is needed, but investors haven’t locked on to that yet and it is difficult to see how much further they can reasonably expect central banks to move to accommodate investor preferences, particularly as it is clear that asset allocation strategies are undergoing systemic change, but that argument’s for another day– ENERGY - Oil prices have also lost almost 7% this week, falling 1% today as Brent took its first weekly loss for just over a month. Prices are now back below $45 a barrel as investors reported took profits against the recent rise in prices (up 20% on a month basis). Reuters reports Brent futures LCOc1 were down 24 cents at $44.77 a barrel at 0848 GMT. WTI futures CLc1 traded at $44.07, down 25 cents day on day – USA – Of course everyone is looking towards today’s non-farm payroll data. Based on yesterday’s insurance claim data, there won’t be much change, but investors will be looking for a marginal improvement. However, they might be missing the mainline story which is that 59 US oil and gas companies have now declared bankruptcy this year, the latest candidates to file being Midstates Petroleum and Ultra Petroleum as oil prices have plummeted by over 60% since the summer of 2014. These are big numbers and ratings firms look to expect the overall number to double by year end. To put this in context, 68 firms filed for bankruptcy at the height of the dot.com bust back in 2002/2003. Significantly, the bankruptcies are not set against a backdrop of consolidation in the sector with M&A activity in energy at an all-time low. Moreover, many US energy firms are debt laden, with investors exposed to high yield bonds in the segment facing the risk that they will lose money.

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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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