Joe Wald, managing director, and head of electronic trading at BMO Capital Markets spoke to Best Execution about the advances in electronic trading over both time and geography.
What are the drivers behind the increase in electronic trading over the past few years and what will drive growth going forward?
Markets have become more electronified over the past decade. As technology has advanced, trading has become more democratised, and the pressure to automate on both the buyside and sellside has driven the growth of algorithmic trading globally.
We recently partnered with Coalition Greenwich to take a deeper look into the Globalization of Algorithmic Equity Trading: A Buy-Side View*, and according to their research, electronic trading has grown to 42% of US and 44% of European equity market commissions. In three years, managers expect this to grow to 48% and 50%, respectively.
According to this report, the buyside is finding it harder to distinguish between brokers during the selection process and ongoing reviews. What do you think this is the case?
The proliferation of algorithms has led to every broker having access to algos, and they can easily create a button on the buyside OMS/EMS for access to those algos. But having a low-touch offering is no longer enough to check the box and get buyside flow. It must be earned.
Earning buyside business is complex. It requires a partnership based on trust, collaboration, and mutual respect. The continuous need to improve an algorithm’s performance requires brokers to successfully deal with market fragmentation, venue selection and measurement, algo performance analysis and optimisations, and overall best execution.
How are different market structures and regulatory regimes across various regions complicating matters?
I am not sure if I would use the word complicated, as I believe each regulatory regime is actively trying to improve its markets. But as electronic trading is growing globally, we can no longer deny that the markets are interrelated, and changes to one market microstructure could certainly impact another region’s market microstructure. For example, consider the US move to T+1. It will have an impact in Canada and Europe.
That is why it is prudent for the buyside to work with partners that have deep market microstructure expertise and algorithms that can be customised to perform in each regulatory regime. That requires a global technology solution that can deliver a consistent execution experience, with customisable routing protocols, A/B testing capabilities, and a framework for continually optimising algo performance in response to changing market microstructures.
What are some of the other challenges in the current market conditions and how do they differ across regions?
Across regions, increasingly more trading is done off-exchange than on-exchange. The increased number of venues and order types and the fragmentation of markets globally can cause challenges in effectively sourcing liquidity. In addition, increasingly more volume is trading in the close.
Both trends require sophisticated algorithms to determine where and how you trade throughout the trading day and how to trade the close effectively.
Almost a year ago, you expanded your electronic trading operations into Europe, Middle East, and Africa (EMEA) – what inroads have you made?
We are uniquely positioned to provide global algorithmic equity trading solutions that serve both the buyside and sellside. For the buyside, we offer institutional electronic trading services, and for broker-dealers, we offer electronic trading technology via the Clearpool Algorithmic Management System (AMS). Our inroads come from our ability to provide our clients with access, coverage, and execution.
- Access: access to 170+ venues globally accessible via the AMS;
- Coverage: regional account coverage and algorithmic execution consultants with deep market microstructure expertise;
- Execution: global algo solutions, developed for the local market microstructure, seeking the best quality executions.
Since our launch, we have onboarded asset managers and broker-dealers in Europe and the UK. We are actively demonstrating our differentiated value proposition and are excited about our continued growth in the region.
What should buyside traders expect from their sellside partners to help solve their challenges?
The buyside should seek sellside partners who have a differentiated offering. Low-touch trading has evolved, and the buyside is looking for partners to help them evaluate algo, venue, and overall transaction performance. They need brokers with a deep understanding of market microstructure and internal expertise to collaborate and deliver algorithmic performance optimisations to achieve better quality executions.
