ON A CLEAR DAY… A BUYSIDE PERSPECTIVE.

Tony Whalley has always been vocal about his views on the direction of the industry. He shares his thoughts about how MiFID is affecting the buyside and what needs to be done in order to improve best execution.

What has the impact been of MiFiD so far for the buyside?

There has definitely been fragmentation. Previously, in the UK, everything was traded on the London Stock Exchange and you knew what the volumes were and therefore, the appropriate benchmarks to use. While the industry expected to see different players in the marketplace, what perhaps it did not anticipate was the impact on the trade data side. There is no mandatory consolidated tape, and under MiFID, trades can be published to numerous venues, including traditional exchanges as well as multi lateral trading facilities, or directly to data vendors. As a result of regulatory changes, there can be a three day wait before we see the trade data. If sizeable trades are not printed, then that could have an impact on the price as it gives traders time to unwind their positions. It also makes it difficult to achieve best execution. From a trading standpoint, we believe we are doing this, but best execution is much more than price. It is a combination of factors including settlement and timeliness.

Do you think there will be a consolidated tape?

This is what the industry is pushing for but I do not think we will get one in the short-term. It means a change of rules for the whole of Europe and that takes time. It is not just about the UK but it impacts all stocks across the continent. It is an expensive proposition. For example, pre-MiFID, the cost of a feed into the London Stock Exchange cost £45 a month per work station but post MiFID, for that money you will not get 100% of the data. However, to plug into all the potential venues will now cost about £214 a month per work station. That is a huge difference. For us, fortunately, the majority of our trades go through the LSE and Chi-X (which provides the feed for free).

How has it affected SWIP?

It has dramatically increased our use of electronic trading whether through direct market access or algorithms. I would say the bulk of our business is going through the brokers’ pipes although we call the shots. The problem, though, is that investment banks are not talking to each other and are trying to internalise as much flow as possible. This makes sense in terms of their profitability, but my concern is ensuring I get the best price for any given stock, rather than lowering the cost of trading which is worn by the broker. My problem with banks internalising flow is there is always a chance I can get a better price elsewhere. I do not want to limit my options. This is why the sellside is looking at developing an independent smart order routng system alongside Turquoise which talks to all brokers’ dark pools as well as the main exchanges and other venues.

What has SWIP done to become MiFID ready?

I think the issues were on the legal and compliance side. We spent massive amounts of time and resources ensuring that we met all the requirements. We also spent two years upgrading our technology not just to meet MiFID require- ments, but to become more effective and competitive in the 21st century.

We installed a new version of OMS (order management software) – Macgregor XIP as well as FIX connectivity. We did not see the need for an EMS (execution management system) because we are long term investors on the systems side and the system we have suits our needs. It enables us to go from fund management to OMS to settlement. I think EMS is more for those who want to trade actively in the markets and are looking for a stand alone system.

Overall, the biggest challenge for us and the industry in general is to ensure that we keep up with the latest state of the art technology and ensure that the technology in question meets our requirements.

What was the reason for joining Chi-X as a non-executive director?

I have always been a keen observer of market changes and new entrants. I also thought it was time to stop complaining about the lack of progress from the outside and start influencing from within. I have, historically, held strong points of view regarding Project Boat and Project Turquoise and now I welcome the chance to bring the institutional investors’ perspective to the table.

The whole point in the current market environment is that we do not want one or the other execution venue to be dominant, as in the past, but we want and need them to work together in a symbiotic relationship.

What is your opinion about Turquoise now that it looks like it will be up and running by September?

I think there is more certainty now that there is an independent management structure and they have set a launch date. It has the backing of nine of the biggest global banks and they would like to see it succeed. However, at the recent TradeTech in Paris, one of the questions put to Peter Randall, (head of Chi-X) was – “What is the difference between you and Turquoise?” His reply was simple – “We are up and running and Turquoise is still a project.” I think we will have to wait and see something more concrete before we can say for sure whether Turquoise is successful. However, it looks like it will become a reality.

Do you think Europe will emulate the US in terms of execution venues?

In the US, it seems that you can buy an MTF off the shelf or on eBay. I do not think it will happen in the same way here. Europe is a different marketplace. There will be fragmentation and then consolidation but there is only limited room for a finite number of venues. Again, lack of clarity over data will hold things back until we follow the US example of a consolidated tape.