RAISING THE BAR.

Frank Troise was hired last year to build a best-in-class global electronic trading franchise. He explains the steps taken to differentiate J.P. Morgan’s offering.

Q. There is so much regulation coming down the pipeline, how do you prepare when the final drafts are not yet written?

A. It is too early to say what the final results will be but regulation is definitely front and centre for the industry. However, you cannot let it distract you from the job at hand. We need to know more of the details before that happens. It is important to think about the future of the landscape but also address the issues today. One of the biggest challenges facing the industry remains the same and in many ways is similar to ten years ago. It is how to access liquidity and now consolidate the fragmented trading landscape in the US and Europe in order to get the best execution results for our clients.

Q. How do you concentrate that liquidity?

A. We have several sources of liquidity that come from various lines of business that we can pull together into a centralised anonymous electronic merchandise hub. Liquidity comes from cash equities, delta hedging and the transition management business which is part of our custodial services. We are also able to consolidate the retail flow from the private client network we acquired from Bear Stearns, JPMorgan Chase branches, and the J.P. Morgan Private Bank.

Q. What do you think the impact of the market access rule will have?

A. We have been supporters of the regulations around market access (it requires broker-dealers with market access to implement pre- and post-trade risk management controls and supervisory procedures reasonably designed to manage financial, regulatory and other risks of accessing markets directly) because it can only help level the playing field and reduce the level of competition based on regulatory arbitrage.

Q. What impact do you think the current wave of merger exchanges will have on the industry?

A. This is just another cycle of operational efficiency-driven consolidation that we have seen in the past. However, this time it is more global in nature and has some implications on clearing. For example, the US in the 1990s experienced a proliferation of electronic communication networks (ECNs), which gathered liquidity and challenged the incumbent exchanges. This led to a reduction in explicit trading costs and subsequently, a wave of mergers and acquisitions ensued. The incumbents bought back market share and technology to gain scale. For example, NYSE bought Archipelago after it had rolled up REDIBook, GlobeNet, and the Pacific Exchange; NASDAQ acquired the combination of Island, INET, Brut, and Strike. This is very similar to what is happening today. The barriers to entry are low and the exchanges need scale. They have pursued new revenue streams, technology driven infrastructure plays, and sought operational efficiencies through consolidation. The global mergers that we are seeing could be beneficial in driving down explicit costs while also providing greater optionality for liquidity access.

Q. You were hired to raise the electronic trading group’s profile. How are you achieving this?

A. I joined J.P. Morgan last April with the mandate to build a best-in-class global electronic trading franchise. The first step was building a team by complementing the existing top talent with additional subject matter expertise via new hires. We pursued an aggressive global hiring plan across client coverage, sales, product management, and quantitative analytics. The vast majority of hiring was accomplished in 2010. We also began to tune up our full suite of electronic products such as algorithms, smart-order routing, crossing engines, and pre- and post-trade analytics. We have been investing heavily in the back end core technology infrastructure as well as client-facing products. In addition to building the team and investing in products and technology, a core part of our strategy has been to deliver to our clients best-in-class service levels via subject matter expertise on market structure, execution consulting, and day-to-day order flow support. We believe that the level of services that we provide as well as our product quality will help us differentiate ourselves from our competitors.

Q. How many people have you hired in the past year?

A. We have hired a significant number of personnel globally across technology, quantitative analytics, product management, client coverage, and sales. Our focus has been on finding subject matter experts who understand what clients are trying to achieve via end-to-end electronic trading tools; whether it be direct market access, algos, routing, or analytics. Also several of our new hires – quants, programmers – have a thorough knowledge of HFT strategies and a deep understanding of low-latency trading, which we’ve leveraged in our products to obtain a competitive edge in the marketplace.

Q. Can you tell me about the new algos that your group is rolling out?

A. Our focus has been threefold: quantitative modelling, customisation, and simplification of offering. Over the past year we have built quant models into our algo platform that provide intelligent order placement for liquidity access and pricing. We’ve also expanded our customisation capabilities and sped up turn around time for client requests. Finally, we simplified the naming of our algo offering to emphasize trading behaviours vs. creative names.

Q. What future trends do you see?

A. Our clients have become much more sophisticated in their use of electronic trading. They are much more interested in liquidity pool usage, routing decisions, and trading analytics. I’d expect these trends to continue. Also, more clients are focused on standardizing their algo offering across providers based on trading behaviours. This can simplify workflow and reduce overheads on desktop real estate and systems integration while at the same time providing for improved trading performance measurement.

Q. What do you see as the biggest challenges?

A. The biggest challenge today for brokers is how to differentiate themselves in terms of algo offerings and execution products. This is especially true in today’s environment where clients are reducing their broker list and deepening their relationships with the largest players. I think we are all trying to break free from each other and differentiate in our levels and quality of service, access to liquidity, and delivery of pre-and post-trade analytics. It is important that we don’t get distracted with far flung ideas. Our focus is to socialise new product ideas with clients to make sure we are delivering top quality practical solutions.