Strengthening the bonds.

Brian Schwieger, head of equities at the London Stock Exchange Group speaks to Best Execution and explains why the buyside is now in the spotlight.

How have you settled in?

The head of equities is a new role that was created last year mainly due to the changes in the marketplace. The LSE Group identified that derivatives was a business for strategic growth, but at the same time, wanted to continue to focus energy and development on its core equities business. I report into Nicolas Bertrand, our head of equities and derivatives markets. My role is primarily to look at ways in which we can enhance LSE’s existing offerings, build a greater awareness around them and find innovative ways to solve issues. As a result I spent the first three months getting to know everyone and learning how the organisation works and the next three months getting in touch with clients to see how we can add value to their trading experience. As the buyside takes more responsibility for their own trading through electronic platforms, it’s important that we have a good dialogue with them as they are the end consumers of our services. The biggest challenge for them is finding liquidity with minimum market impact because of the market fragmentation. It is time for us to refresh ideas and ensure they know about our existing and new products.

What changes have been made?

We made a number of changes to our International Order Book (IOB) such as reducing the tick sizes for the most liquid IOB stocks such as Gazprom, Rosneft, Sberbank and Lukoil, to align with the FTSE 100. We also brought forward the start of regular trading to 08:00 compared to 08:15 so the opening time could match that of the SETS market.

We also just ended a consultation to further enhance the trading of small to medium enterprises (SMEs) which includes looking at improving the functionality of SETSqx (a hybrid trading service that provides the functionality of four daily electronic order book auctions with standalone non-electronic market maker quotes). We hope to make some announcements in the next month or two on other new products.

Do you think that best execution since MiFID I has improved?

It comes down to how you define best execution. If you are talking about child-to-child orders then things have definitely improved but if you are looking at parent orders then it has become more difficult to execute these kinds of trades. This is because it is much harder to find liquidity due to fragmentation. The market though has recognised these challenges and has created technology in the form of smart order routing, new platforms such as dark pools and broker crossing networks and strategies to address them.

What impact do you think MiFiD II will have?

We have fairly well defined principles but in order to implement them we need a clearer set of details. This is particularly true with how trades are flagged. Today, dark trading operates under the reference waiver (allows transactions to take place off-exchange if they are matched at the mid-point between the best bid and offer generated in the lit market). I also think caps on dark trading will be a reality. Under MiFID II, the proposals are for them to be placed in a stock to 8% of the volume traded in the European Union as well as the volume on any one platform at 4% of the total EU market in that stock. I think where it will hit will be the more liquid names, and the challenge will be in finding ways to connect the liquidity. However, we have time to develop solutions and as MiFID I has shown the industry can be innovative in terms of new ideas, products and platforms.

How do you think the buyside has changed the way it trades and what impact will the new rules have?

The buyside has definitely changed the way it trades and they could become even more holistic in the future. We are already seeing some portfolio managers taking more of a hedge fund approach and working closely with their heads of trading. In the past these two were separate but increasingly they are interacting with each other. There is also much more focus on the cost of trading not just from the execution side but end to end, particularly on the post trade side. If dark trading becomes constrained under the ‘double caps’ regime, we could also see a return to portfolio trading, particularly with volume weighted average price (VWAP), as well as requests for capital commitment, although that would be difficult given the constraints that investment banks are under because of Basel III.

What other changes have you seen on the buyside?

The composition of the market’s eco-system has changed over the past year with a clear increase in long-only flow. We have also seen the return of US investors to Europe and I think this will continue. There had been interesting discussions over reverse rotation but 2013 saw a 20% rise in markets and there is still a healthy interest in equities. However, we understand from market analysts that this may be a more challenging year for fund managers. Last year, if you had simply tracked the index, you would have been a winner. Views seem to be that this year success will be much more about alpha and stock picking – and that certainly seems to have been the way the year has started.

Against the backdrop of ICE buying NYSE Euronext, do you see more consolidation in the exchange industry?

People have talked about consolidation for a long time but we have not seen the same proliferation of venues in Europe as in the US. The market has been more stable. There is always room for more competitors but the real question today is about the value-add of the business model. The challenge for any venue is not only its ability to deliver the liquidity but the quality of the flow.

What other challenges do you see facing the industry as a whole?

The need to innovate is crucial because exchanges and MTFs both have certain fixed costs that they need to cover. They are not coming down and you need the right value proposition to help you stay ahead of your competitors. Investing in technology is also critical but timing can be difficult. For example, if you make the investment too early then the business may not be there but if you are too late you may have missed the opportunity. We believe that one of the keys is to be much more client focused and pay better attention to our participants, the nature of their liquidity, where they chose to trade and how we can better partner with them.