AFS: Fundamentally, the key evidence is that obviously in the liquidity constrained environment, you are already executing trades in the dark pools. What we experienced with quite a few people is that they actually start to increase their algo usage over the day, so they will not take so many views. The next question is how critical is liquidity aggregation to your model?
JT: Aggregation is something I take quite seriously, although it is segmented for us. In terms of active deals and risk arbitrage, the relative sophistication of the aggregation has increased, so the ability to randomly get price dislocation in any real size in quite low. Liquidity aggregation across brokers, however, is as much personal as it is technology. The converse is true in Japan, where liquidity aggregation has been important, now that there are so many execution venues. The traditional Japanese risk arbitrage trades are incredibly tight and they tend to be very wellflagged. As a result, we may set up at a target level a long time ahead and wait for the day of the event. The deal timeframes can be 6 months to 1 year to complete, so you have a lot of time for these things to mature before they come out of an index.
It is increasingly necessary to analyze how much of a stock is trading in PTS venues along with looking at overall broker flows.
AFS: So I suppose the answer is that liquidity aggregation is important, but it is more than just a pure multiple venue aggregation. On the topic of venues, Asian exchanges have many models for investor transparency, ranging from full IDs, non-IDs. What macro level benefits do investor ID programs provide?
JT: Honestly, I am in the same boat as a majority of the institutional, non-domestic investors who strongly dislike the ID market. Even Hong Kong’s method of transparency is unnecessary and I would prefer they got rid of it. Traders should be able to trade without worrying about the effects of having large foreign brokers on the offer for a mid-cap name in Hong Kong. As another example, if you trade in Korea you may give your trade to a foreign broker, but they execute through a local broker, what advantage have they gained? Many intelligent investors know what is happening, and they just game around it.
AFS: Do ID markets encourage or discourage gaming and broker shielding?
JT: There is one algo platform being developed in the US, and another one in Europe, that chooses different brokers on your order, and if there is any disruption, it automatically knocks over to another broker in randomization. If enough people are aware of broker shielding, then the ID has probably past its usefulness.
AFS: The whole concept of dark pools is minimizing market impact. If there is a mid-cap/small-cap name that is heavily traded by local retail, would you rather rather give the order to a local broker even though it adds another layer to settlement.
JT: If you need to access liquidity then, yes, you access via the local broker. The key here is developing a relationship that minimizes any information slippage.
AFS: Last big question, do investor ID requirements discourage you from trading those markets or pursuing any deals?
JT: The deals part is actually quite interesting because in Korea, Taiwan, Indonesia and Malaysia, you have capacity constraints in terms of your ability to hedge market and currency risk on the ID format, so we are more selective about approaching situations there and I imagine other firms have a similar issue.
Asia Hedged: Talking Trading with Senrigan
