A MATTER OF FINE TUNING.

Adam Conn of Barings discusses the changing marketplace and how his team is responding.

Q. What has been the impact of the financial crisis as well
as regulations such as MiFID?

A. We have seen a huge change in market infrastructure over the past two years with new trading and reporting venues. Fragmentation has made it challenging to make sure that you are accessing the right venues and liquidity. In turn this has created contention over the accuracy over how much volume has traded and to a certain degree where the liquidity really lies, especially as the new venues that have emerged seem to have all unilaterally created their own (often conflicting) acronyms for describing different trade types. There has also been tremendous growth in the adoption of electronic trading by the buyside. Whilst there has been a general de-leveraging by traditional hedge funds there has been rapid evolution of firms employing high frequency trading (HFT) models. The combination of increased algorithmic trading and new trading participants has lead to average trade size decreasing by 60-70% over the past few years

Q. There has been a plethora of new regulation in response to the financial crisis. What effect do you think it will have on market structure?

A. I think there needs to be a further deepening of the efficiency of markets in order to restore investor confidence. Michel Barnier (European Union internal market commissioner) recently highlighted this when he was speaking to journalists and said that financial services need to serve the real economy. My view is that this time regulators have significant potential to make fundamental changes because politicians are taking more of an aggressive stance, with the burden of proof changing to why regulation should not be imposed, rather than why it should.

Q. Do you think that Europe will move more towards the
US type of regulatory environment?

A. As you know, the UK is a principles-based market versus the US, which is rules-based. I think it would be advantageous to see the establishment of a middle ground or convergence between Europe and the US with a common set of rules adopted to avoid any wriggle room.

Q. What areas would you like to see tackled?

A. In general, we would like to see greater transparency. There are many more sources of liquidity in the market so there needs to be an appropriate level of regulation which allows innovation and competition as well the ability for us as the buyside to execute our business without any information leakage. As for specific areas, I imagine high frequency trading operations will be in the spotlight but they should not be looked at as one group. They need to be split into those that are genuine liquidity providers and the scalpers who pollute the market with unacceptable and toxic liquidity. My hope is that European regulators will be able to make a clear distinction between the two and the rules will move more in line with the US. At the moment I understand there may be HFT entities that are exempt from FSA (Financial Service Authority) regulations but still have access to the order book, and that should not be the case.

Q. Do you think that the MiFID review will produce a consolidated tape, which has been a hot topic of conversation for the past two years?

A. I think one of the problems with MiFID is that it led to a proliferation of reporting venues and as a result it is difficult to determine pricing and where the volume is traded. It is also expensive to access the information from the different venues.

There needs to be higher quality data available to allow dealers to make more informed decisions and a consolidated tape would enable this. In fact it goes to the heart of best execution. However, whether it is left to the industry to create its own solutions or whether it will be enforced on the industry is another matter. I hope there will be a period of consultation between the different players and then one venue will be chosen which will create a more level playing field.

Q. How would you like to see dark pools develop?

A. There has been a great deal of debate over the disclosure of volumes transacted in broker dark pools but I’d rather look at the big picture. I am more interested in the order handling and crossing methodology of the broker. If dark pools were registered with a regulator and this information was available it would help investors distinguish between the different firms and decide which are the best venues for execution.

Q. Do you foresee consolidation in the MTF / exchange space?

A. I do see consolidation among the incumbents especially if the economics of the business model are not there. However, with the advances in technology I expect new venues to pop up. As for the exchanges, the main problem is that they are still dominated by national interest and while it makes sense for them to merge and become stronger, there may not be the political will to do it.

Q. How is Barings set up?

A. We have always had a strong culture of governance and I think one of our differentiating factors is that I report directly to the office of Barings’ Chief Operating Officer. This affords the dealing desk independence from the investment team to avoid any conflict.

In terms of structure, we have two multi-asset trading desks with eight dealers in London and three in Hong Kong, trading equities, fixed income and foreign exchange. The average industry experience level is 13 years and they have all been with Barings for an average of six years.

Q. What changes have you implemented since you
have joined?

A. I implemented a new trading desk structure, which better defines the different roles of the team. I have also increased interaction between London and Hong Kong to create a more fluid dialogue. So for example, we can switch the India trading book on an intraday basis between the two desks in a seamless way. We are also implementing a new order management system and looking at ways to further develop electronic trading solutions across the different asset classes. Once these applications are in place, there will be greater automation of the workflow of low-alpha, low-content trades which would allow our dealers to maximise value by staying focused on the right high-alpha and/or high-urgency orders. We already employ sophisticated transaction cost analysis that involves both dealer and investment manager and that will evolve further.

Q. Looking ahead what do you see as the greatest challenges?

A. The trading environment is changing rapidly and I think one of the greatest challenges is to improve efficiency, to develop a healthy balance of tools to trade with and access the different liquidity pools and to comply with new regulations as they evolve. To that end we work very closely with our compliance department to ensure that we can quickly adapt to change.