SEEING THE BIGGER PICTURE.

Andrew Willis, Head of Exchange Traded Derivatives execution, Global Execution Services at Societe Generale, spoke to Best Execution about the challenges and opportunities of incorporating derivatives into a truly cross-asset trading operation.

Trading cross-asset class and breaking down the silos is not a totally new phenomenon. How long has SGCIB been trading cross-asset class, what are the drivers behind this trend and what has been the impact of regulation?

Societe Generale has always been agile in reacting to changing client needs and the evolving market place, and in common with many other large global banks, has historically offered various cross asset solutions to its clients. The integration of Newedge into Societe Generale’s Global Markets division and creation of Prime Services brought an opportunity to develop the cross asset model and improve co-ordination, centralising agency cross-asset execution.

It’s a dynamic industry that without doubt is getting smarter, maturing and adapting to new markets, access, products, and different investment appetites, with an increasing focus on risk management whilst searching for alpha. This is true across the investment process, from decisions on asset allocation through to execution, where implementation alpha can be captured or lost.

This, along with changes in regulation, has resulted in renewed focus in technology, from cross-asset order management through to advancing execution tools, with improved risk controls as products and markets become more (electronically) accessible. This has in turn lead to greater centralised governance; controls and risk management need to align as processes across asset class begin to harmonise, specifically within the agency model.

The electronification of access and various market microstructures has therefore brought many synergies across asset classes, both in terms of tools and costs. And it will continue…, but this also brings significant challenges, for example managing the skills curve, applicable to both buyside dealing desks and sellside service providers.

Regulation of course remains a major catalyst, if not the most significant, and will continue to drive change in market microstructure, transparency and liquidity, and therefore the access to trade and execute. But the “big bang” events, with technology and an evolving controls focus, are now becoming more manageable, albeit increasingly costly.

What impact will MiFID II have on this trend?

MiFID II will undoubtedly accelerate what we’ve already seen, including new controls frameworks with both implicit and explicit measurements. I believe there will be growing focus on cross-asset best execution, which is already well underway, with renewed transparency and further microstructure changes a certainty. As we witnessed with the first EU parliament legislation (MiFID), new product providers and technology will have to respond. We are already starting to see this with GMEX and ERIS for example, and Societe Generale’s cross asset Prime Services and Execution services are already well positioned to respond.

In the derivatives space, what lessons can be learnt from the cash equity markets in terms of transaction cost analysis (TCA) as well as trading? Are you seeing a greater demand for execution tools?

We are indeed seeing a greater demand for cross-asset execution tools and I see that trend continuing in the agency service model. Fragmentation changed the cash equity market place and the industry had to adapt quickly, triggering the rapid development of new technology. The importance of TCA promptly grew alongside, as navigating new venues and utilising increasingly intelligent tools required greater, more detailed monitoring.

Execution and TCA now go hand in hand and we offer both Cash Equity and Futures TCA services. We’ve seen increasing TCA requests from clients executing listed derivatives and expect this theme to continue into other asset classes as the market microstructure evolves. Electronification and the importance of execution as a source of investment alpha will drive this trend.

How are algorithms being used in the derivatives space?

The use of algorithms in the listed derivatives space depends on a number of variables: the underlying asset class, market microstructure, client type and the investment objectives. It’s an interesting challenge trying to meet differing needs, whether building more sophistication on top of current strategies or engaging in relatively new products or styles. Historically many of the service offerings have been leveraged from legacy cash equity modelling, simple time weighted or POV (percentage of volume) strategies. However the full integration of Newedge into Societe Generale has created a unique opportunity, with bespoke asset-focused algorithms dedicated to cash equity and listed derivatives, complementing and enhancing our existing portfolio of global strategies. We have seen increasing focus on specific asset class microstructure and, as a result, a rise in customisation requests that have previously been commonplace across cash equity. We are already well into our investment programme, listening to our client requirements and providing specific solutions whilst preparing for increasing cross-asset electronification.

How is the integration of Newedge and SocGen progressing and what type of products can clients expect?

Prime Services is now a fully integrated business line within Societe Generale’s Corporate and Investment Banking’s capital markets.

Further to developing our existing cross-asset prime brokerage and clearing model, Global Execution Services provides innovative execution solutions across global cash equity and listed derivatives.

We have unrivalled access to 125+ global markets and exchange venues, with a single order and execution management platform, operating a 24/6 ‘follow the sun’ global coverage model.

Algorithms and engineering are in our DNA: our Algorithmic Execution group is a global team of cross-asset quant traders and developers that sit within Global Execution Services. The focus is to continue developing an already established platform with cross-asset execution a key focus for the bank, supporting Prime Services and preparing for the evolving market environment.

Retaining pre-eminence in the changing world of prime brokerage and execution, Societe Generale has already made investments in GMEX and ERIS.

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