By Lee Bray, Head of Asia Pacific Equities Trading, J.P. Morgan Asset Management
I have been in the equity trading business for 20 years, and during that time buy-side single stock trading has, in essence, remained the same as when I started – with a few minor tweaks.
Meanwhile, the low touch world has been going through significant change for many years now: smart algorithms, wheels to determine which provider is best, innovations around dealing with the rapidly evolving market structure; the list goes on. This dichotomy between the two is perplexing.
Single stock traders throughout the world, in whichever market they are operating, are often responsible for overseeing trades that are significant and material to the underlying portfolios. How have we arrived at this status quo?
In my view, there is one core reason: the lack of investment by the industry in single stock trading. This may once have been justifiable given the absence of real-world solutions that could help. However, this has changed in recent times with the advent of machine learning techniques and the accessibility of TCA (transaction cost analysis).
Before any firm embarks on a path to reassess their approach to single stock trading, they should first acknowledge failings that are almost invariably present within their current workflows, most notably the lack of a consensus view on what makes a “good” high touch execution strategy. Realistically, firms that have two single stock traders with the same trade will each take a different view on how to execute and likely will also employ divergent approaches. This is not their fault: it’s merely the lack of a constructive set of defined criteria which were not accessible in the past.
The world has moved on, and most asset managers now have access to tools such as portfolio manager profiles and more advanced systems that can indicate what could be the drivers of a particular stock move. If trading desks can put a framework around this and get comfortable with it, they can start to provide meaningful, quantifiable feedback to traders to start making improvements and leveraging outcomes.
I’ll simplify the workflow to make a point. Currently, I see three key decision points for high touch traders.
Workflow for high touch trading
First, the decision to trade a block should there be one available. Second, if there is not a block available, then what is the best way to work in the market while searching for blocks? Third, determining what information to give to the street to enable them to do their job concerning matching buyers and sellers.
J.P. Morgan is developing quantitative methodologies to address and inform our high touch traders at these three key decision points, as well as working with our quants to construct a framework around when is the correct time to adjust a given strategy. Having this structure in place simplifies workflows and makes high touch trading significantly more intuitive.
To date, we have made significant progress. Traders already receive a recommendation on which broker to leave information with to optimize potential block outcomes for the benefit of our clients. Block releases are captured and time stamped so we can much better understand the consequences of our traders’ actions. Also, a framework is currently under development to create a recommendation around “trading strategy” that will supplement the high touch traders’ own input.
Needless to say, the level of flexibility is greater in the high touch world when it comes to intervention, but this framework provides a base for our quants to help improve execution quality, where there was none before. By the end of 2019, a number of other factors will have been baked into the model to provide a significant step forward in achieving optimal outcomes.
This investment, and the framework it provides, give the traders more confidence in their decision making and allows them to understand with hard numbers which counterparties are working for them and which are not in the brokerage community. Put another way, this process enables them to start to move away from the current best practice of a qualitative overlay when making decisions. With more confidence comes more information to those on the street that are meeting requirements, allowing sell side traders to do their job in providing added value to the blocks world and to move away from the prevailing thought that algo execution is the first port of call when working large orders.
In order for this evolution to have the maximum effect, there is another change that needs to happen – within the traders themselves. Embracing new technologies and techniques is vital, and those firms who push forward in this space will have the most open-minded single stock traders; those who are willing to adopt new and exciting changes to increase the efficiency of their role and empower them to make more informed decision.
We are at the start of a period of dramatic change in this critical space, and I am looking forward to seeing a group of traders who have been underinvested to move forward as the industry takes the next step.
