CHANGING DIRECTIONS.
Brian Schwieger, head of EMEA algorithmic execution for Bank of America Merrill Lynch explains that trading in these markets is anything but smooth sailing.
Q. How would you summarise the current trading conditions? Is lower volumes the new normal?
A. If you look at volumes over the past couple of months, they have actually been stronger, particularly in relation to the past two years. Admittedly they did fall off in the fourth quarter of last year but usage is back up where it was at this time in 2010. These were the trends before the recent activity around the Japanese situation. One of the main reasons behind those trends was the rebalancing activity we saw from several fund managers, rotating into European equities and out of emerging markets and fixed income.
Q. In general what are the trends in electronic trading for the buyside?
A. It has taken time for the buyside to invest in all the infrastructure required for electronic trading as this is not just about sending the orders over electronically. It also impacts the back and middle office functions in terms of the processing, clearing and settlement of the trades. What is clear is that the number of firms using electronic trading is rapidly increasing with the proliferation of Execution Management Systems among buyside traders.
Q. And the sellside? The financial crisis took its toll on the bulge brackets but they still dominate. Why is that?
A. With the buyside investment in electronic trading, there is the initial investment and then ongoing maintenance. For the sellside, it is a continuing process of developing new trading techniques to improve the performance and efficiency of the electronic trading experience. It is a very competitive market and as a result you have to continue to support and invest in a sophisticated trading infrastructure. However, barriers to entry are high which is why the bulge bracket banks still dominate. These firms are able to capture the required scale to justify this investment because of the breadth of their relationships and services. It’s not just about electronic execution, but services across the board including prime brokerage, investment banking and foreign exchange. It is also down to old-fashioned human relationships and the quality of services and products. The firms that have helped their clients get through the financial crisis have found that their client relationships remain strong.
Q. In terms of the development of products, what algos are being used today?
A. I would say in terms of general usage, people have gone in two directions. They have either opted for lower impact VWAP type algos over a longer period or used more aggressive, shorter duration tactical algos. The next generation of algos are much more sophisticated, intelligent and timely. They are leveraging some of the approaches used in high frequency trading. For example, some are using complex event processing platforms to monitor and create signals which the appropriate algos can react to.
Q. What about developments in the futures industry?
A. Everyone has recognised that equities have led the way in terms of the development and sophistication, but not everything that has been done in the equity space is leverageable, or even desirable, for futures. Futures do not yet require smart order routing, and the liquidity and microstructure patterns are very different. From a trading perspective, there is a much greater emphasis on the granularity of scheduling with futures algos. The most popular approach in futures is TWAP (time-weighted average price). This is because traders are often very sensitive to what their exposure and risk profile is second by second compared to equities, where traders place a higher emphasis on ease of use because of the higher order flow.
Q. What impact do you think that MiFID and other regulation will have on the market?
A. One of the issues is the lack of a consolidated tape although I think MiFID II will provide a framework that will allow the industry to make some progress in creating one. Another area of much discussion is delayed reporting. (CESR proposed shortening permitted delays to ensure that the vast majority of trades are reported no later than the end of the trading day). If approved, this could result in an increase in the cost of capital for many buyside institutions when looking to trade large blocks of stock. The other hot topic is the classification of trading platforms, and what the differences will be between an OTF (Organised Trading Facility) and
an MTF.
Q. What impact do you think that the current spate of exchange mergers will have on the market?
A. I think the impact will be greater on the sellside versus the buyside. In some ways though it opens the door to improved efficiency because there should be fewer platforms to connect to. That could make our job easier as in the past the industry had to undergo a number of technological upgrades and maintenance work for each trading platform that we are connected to. Consolidation of technology is one of the drivers for venue consolidation, but this can take time as the NYSE-Archipelago merger illustrated – it reportedly took 4-5 years to consolidate technology here.
On the other hand, there are some potential competitive concerns which venue consolidation raises, and we’ll have to wait and see how this pans out with both the regulators and then in practice.
Q. Looking ahead, what are the challenges and opportunities ahead?
A. The major challenge is to keep making the investments that will enable us to remain competitive. The opportunities are taking what we have learnt in terms of efficient execution in the equity space and applying that across all asset classes. l
