TAKING ON A NEW ROLE.

Despite MiFID, best execution is still difficult to define. Brian Mitchell, who has recently stepped into the new role of head of dealing at Gartmore assesses the challenges in the industry.

Do you think best execution is any easier to define after MiFID?

As with most on the buyside, we define best execution as the process of executing transactions. This means taking all reasonable steps to obtain the best possible result for our clients taking into account the price, costs, size, speed, nature of order, likelihood of execution and settlement and any other factors relevant to the execution of the order. We will have regard to our clients’ particular characteristics, the nature of the order, the financial instruments being traded and the execution venues to which orders can be directed. We monitor “best and timely execution” primarily through our third-party transaction cost analysis (TCA) services.

Best execution, however, has always been tricky to prove. The definition to my mind is attempting to describe the overall aim of those transmitting / executing orders. It is striving to get the best overall outcome for our clients. This in reality remains difficult to prove as it inevitably will depend on the exact conditions at the time of the trade. Since MiFID, proving best execution in Europe is actually harder as trading is much more fragmented across different venues.

What are some of the other challenges in achieving best execution?

I personally believe that higher quality post-trade data, particularly from the dark pools, is key to understanding where best to transact our clients business for optimal execution. Currently we do not get information from every venue and a result there are inconsistencies in the extent, quality, reliability and calculation of data. The standard information provided by brokers to us around how they meet best execution obligations remains poor and tends to still simply repeat MiFID wording. We and I believe other buyside firms have to pro-actively push brokers for more granular information.

In relation to the stat arb or high frequency traders, to the extent that they add additional liquidity, they are not though seen as true market makers and as a result are not fully regulated by MiFID. One issue CESR (Committee of European Securities Regulators) could consider is can it obtain required trade data from them, and is it of comparable standard to what most brokers / investment firms provide.

Do you think that a consolidated tape will be in the CESR recommendations?

I think we are generally moving towards that direction because there are a lot of interested parties, but one of the main questions is who is going to pay for it? We do not want to have to pay, for example, for multiple feeds from Markit, Reuters, as well as Bloomberg and other providers. All primary exchanges charge brokers for the data and they then pass it onto us. I think that the buyside should be more vocal about the issue. At the moment the brokers have the loudest voice. Inadvertently MiFID has resulted in an unlevel playing field between buyside firms. It is those that can make the significant investments in technology that are better placed to take advantage of the fragmented market because they have an increased ability to search for prices and liquidity.

Overall, what impact do you think the CESR consultations will have?

Few brokers mentioned to me that the review will lead to a cleaner delineation of crossing and internalisation, with an end to the use of SI for crossing for example. I think it will have the biggest impact on dark pools and MTFs. It could lead to further banks creating MTFs although there is a risk of restricted activity.

In terms of the final outcome, I think the recommendations will probably be based on compromises from two sets of opinions. The regulators in some countries such as France and Germany are pushing for a restriction of dark pool activity as well as to the waiver regime, but others such as the UK would like to see a relaxation of the regime. It’s also worth noting that only three countries seem to be in favour of a mandated monopoly consolidated tape. The timeline is also short for the consultations. They were issued on April 13 and the deadline is May 31, with a view of submitting a final version on 31 July. I expect there will be many European Commission discussions before then.

How does the execution process work at Gartmore?

I have 14 dealers in London and Tokyo that execute trades for our 13 fund management teams across multi-products. We use over 130 different brokers a year and have about 20 commission-sharing arrangements in place on the equity side. A typical global broker in our top 20 list has access to more than 70 execution venues (via its smart order routing technologies), in order to help facilitate “best execution” for us as well as our end clients. The dealers are at all times responsible for ensuring best execution for our clients, be this via broker selection, trade execution or negotiating commission and/or financing rates for certain types of trades.

How do you choose your brokers?

We have a list of ‘approved brokers’ that dealers cannot deviate from. Approval of new brokers and daily order-monitoring is conducted by the Counterparty Management Committee, which is independent of the operational, dealing and investment functions of the business. The brokers are monitored for continued credit worthiness as well as for dealing efficiency. The aim is to reduce trading costs across multiple products, identify potential deficiencies and help to ensure that investment processes are in line with market standards for best execution. We also conduct detailed TCA and within that we focus, amongst other things, on both the explicit and implicit costs of trading.

How has technology changed the relationship?

The advent of electronic trading platforms directly linked to brokers and venues, via protocols such as FIX or FIX hubs allows us to transmit and execute our trades more rapidly. As a result, the focus of trading has shifted to short-term price volatility rather than share price movement over a long period. Reflecting this change, it has become important for us to continually review and enhance our trading analysis capabilities. We currently use an independent TCA service to help analyse in detail the true impact of equity trade implementation on client accounts and to analyse broker, and our own dealers’, performance. For example, we send all trade data from our order management system on a weekly basis, to our TCA provider.

You just arrived from Barings earlier this year, were you looking for a new challenge?

Yes, I was. The two firms are of a similar size but the mix of business is different. Baring is more of a traditional long-only fund manger while Gartmore has more absolute return / hedge funds and consequently higher trading turnover. Also, this is a new position / role at Gartmore and reports into the CIO (chief investment officer). Since I have been here, I have conducted initial due-diligence and TCA on historic broker / venue performance across cash, programme trading and algo usage. I also refined historic TCA processes / benchmarks as well as commission management / CSA processes and on-going oversight. I also established a new monthly dealing oversight group, which is attended by the chief investment and compliance officers. It covers relevant trading, TCA, regulatory / oversight topics and obligations.

And what are your plans for the future?

I am continuing to develop Gartmore’s strategies to tap into emerging sources of liquidity, dark pools and algo / DMA usage evolution. I’m also refining the current dealer / broker appraisal system, including monitoring more quantitatively performance using current TCA tools. While also revisiting our broker lists, across products, with a view to consolidate somewhat at the expense of poorer execution performers. Another short-term aim is to improve our feedback and granularity of data to our brokers and venues at scheduled reviews throughout the second half of 2010.