The Summer, 2013 issue leads with a frank interview with Paul Squires of AXA IM.

TAKING THE LEAD.

Paul Squires of AXA IM discusses how the financial crisis gave rise to the empowered buyside trader.

What impact do you think MiFID II will have?

I do not expect it to materially change our commercial proposition. We would have to change our algos if for example they got rid of the reference point waiver or minimum resting period but it will not have an impact on whether there is a need for a buyside trader. I would like to see a consolidated tape come out of MiFID II but I think the focus has shifted from seeking the perfect ‘tool’ to more general enhancements to post-trade reporting standards and granularity.

Overall, I think that the Financial Transaction Tax(es) will have a more significant impact on the industry. The Italian and French versions have not caused too much of a concern in terms of deteriorating liquidity and spreads. However, the initial European draft will be significantly more damaging if it goes ahead in its current form. In short it could encourage global market arbitrage and it would ultimately affect the real economy which is probably why there are already counter-proposals to water it down.

What about EMIR (European Market Infrastructure Regulation)?

This is where our focus has been recently. We are setting up front to back end processes and structures to meet the new requirements. As part of that due diligence, we have drawn up a shortlist of clearing members we would like to work with.

How has the relationship with the sellside changed since the financial crisis?

In the past there was a greater reliance on the sellside to provide the intelligence, tools, analytics and systems. The buyside trader would pick up the phone to the sellside sales trader and have a conversation about the orders and form of execution. This has changed and what we have seen over the past few years is the empowerment of the buyside trader. One reason has been the rationalisation on the sellside because of falling commissions and shrinking margins. This has been unsettling for us and the industry because, among other things, people form professional relationships with people they work with so closely and this can add value to the execution process. However, the buyside can’t really complain because to some extent we drove the model by wanting those lower commissions and more algorithmic trading.

What has been the result?

We are more in charge of the decision making process (around execution) but this has come at a cost in that you need to have the right tools and capabilities to do it yourself. We conduct rigorous due diligence and trade with around 100 different brokers although we have significantly consolidated our list over the past three to four years. A big percentage of our flow goes through our top 20 or so brokers with a large tail being handled by local specialists used for specific mandates such as small caps or emerging markets. We rate brokers on a variety of criteria with transaction cost analysis accounting for a 35% weighting followed by the quality of execution intelligence, IOIs (indications of interest) and general service.

I actually don’t see too much difference between the top global brokers because they provide almost everything we want. The level of service is not the same though as in the pre-Lehman days where there were maybe 30 sales traders covering different markets and sectors. Their headcount has been cut at the same time that their client base has grown. This means they do not have time to be as proactive, scrutinise markets and stocks or call us with any breaking news in a particular stock for example if an order has been executed.

Do you think that unbundling is finally happening?

Yes, I think we are actually beginning to see the dawn of a new era. The Financial Conduct Authority has reinforced to fund managers the need to avoid conflicts of interest and to split the commission components more than they did in the past. Having the execution decision segregated from where advisory services are being consumed is liberating and positive from a clients’ perspective: it is their money and it is important to ask whether you are using their commission spend for execution and advisory services in the most effective way.

There is a trend toward multi-asset trading today, although I know AXA was one of the first. How has it developed?

We introduced a new order management system (OMS) in 2005 from which all asset classes were executed. This enabled connectivity to be set up and provided us with an STP (‘straight through processing’) solution for equities, fixed income and FX: using FIX either directly to brokers or to RFQ (‘request for quote’) platforms. More recently we have integrated an execution management system (EMS) to enhance the functionality of a single platform for multi-asset trading. We started with equities, which upgraded our algo capabilities to offer greater granularity on how we are trading, which venues we are using, and are about to move FX onto our EMS, which has already enabled us to deliver enhanced execution performance analysis. This supplemented the benchmarking work that we had already been providing in fixed income using our proprietary tools.

Do you think there will be more consolidation on the exchange and MTF front?

The proposed merger between ICE and NYSE Euronext is interesting because it proves exchanges are not profit generators in their own right but need technology, clearing, derivatives and data to make money. The merger between Chi-X and BATS also shows that they needed to diversify their own channels. However, some countries still seem to attach some Nationalistic ‘prestige’ to owning their own primary exchanges which represents something of a constraint to consolidation and we also see other entrants launching new venues.

Looking ahead what opportunities do you see for your business?

What we have done over the past four years has been partly strategic and partly in response to the market environment and changing client requirements. I do think there will be opportunities in the outsourcing of execution services as smaller to medium sized asset management firms may not have the resources to have dedicated traders and the infrastructure or expertise required to meet the accelerated regulatory changes.

I think the extension of outsourcing of back office operations to a review of segregated trading desks is something that might emerge. We have 31 traders across all asset classes including derivatives, have a technology platform which enables connectivity, performance analysis and client bespoke reporting and spare capacity to take advantage of such economies of scale. If the need for further investment in a trading capability becomes more of a barrier to entry for smaller asset managers then consolidation of such services could easily occur in buyside trading as it has done elsewhere.