KEEPING SCORE. 

Best Execution speaks with Matthew Cousens (right) and James Hilton (left) at Credit Suisse, who discuss the different conversations they are having with their buyside clients and how the electronic trading business is changing.

What were the drivers behind the restructuring in Feb?

Hilton: To be honest they were good drivers in that the AES management had done a good job in building a successful business and because of that the management team was seen in a positive light. As a result, some of the team have been deployed to help develop other parts of the business. For example, Rob Maher, (who was previously head of AES sales, Europe at Credit Suisse), has gone to the fixed income division as global head of EFX sales.

Cousens – The other reason is that other asset classes aside from equities are looking to modernise the way they trade and the bank is leveraging our experience.

What if any impact have the cutbacks had on your operations?

Cousens – The restructuring that we underwent in February had nothing to do with costs. AES is in good shape. In fact the number of personnel has not changed over the last five and half years. What has changed is the functionality and our emphasis on trading coverage versus new-sales origination. We have become even more client focused and are out of the office more talking to them about their requirements and how we can help them optimise their trading strategies.

Hilton – The electronic trading business model has matured and as a result our roles have changed. Our coverage desk has more people and on the sales side, we are having different conversations with our buyside clients. We have a significant number of clients on board now and they understand how to use algos and are clued up on best execution but they need new services so that they can trade more effectively. We have also developed new products such as the AES Alpha Scorecard which we launched last year. It analyses the quality of execution-flow across different trading venues on a short-term basis. The programme then steers clients to the most appropriate venue and matches their risk profiles.

What was the reason behind the launch of this product?

Cousens – Let me put it into context. There are huge concerns over the increasing levels of high frequency trading and the Alpha Scorecard enables our clients to better understand who they are interacting with in the dark pool. It builds a profile of the client over time, not just on a trade-by-trade basis. This has given clients a lot more confidence and it is proving very successful at allowing us to monitor participants in the pool. One of the biggest issues in the past was that there was no quantifiable way to measure a profile, until now. We relied on generalized, subjective categorizations.  The AES Alpha Scorecard gives clients transparency in terms of who they are trading with.

Do you think high frequency trading will be regulated?

Hilton – There are many arguments against high frequency trading but the fact is that quant-based strategies account for more of the current market activity and if you were to strip them out then you would see a significant reduction in the availability of liquidity. Spreads would widen and in turn trading would become more expensive. However, there are also different types of high frequency traders and it is important for the regulator and brokers to understand the differences.

What do you see as the impact of regulation in general?

Hilton – Regulation is difficult, costly and time consuming but we recognise as a bank that certain events have to be addressed. It needs though to be implemented with due thought and consideration.  For example, areas such as the proposed regulation of dark pools under MiFID II need to be improved. The general consensus is that the advent of dark pools has been beneficial to the buy-sides ability to trade and they are concerned with the talk of regulating them.

Do you think that best execution has improved under MiFID?

Cousens – MiFID started the process of competition and this has certainly driven down costs and tightened spreads. We have also seen an increase in resources within the buyside to study specific trading details and data, yet the definition of Best Execution is still undefined – it is essentially still just a policy – and clients have different views on how to achieve best execution. 

Best Execution understands that the strategy has been to keep AES as standardised as possible around the world, with algorithms customised for each country by local teams and quant developers. Can you expand on this?

Hilton – Yes that has always been our philosophy – we keep the headline strategies very similar, with relevant tweaks to accommodate the local markets, and then each region will work with local clients to develop custom solutions. Those custom solutions can of course be shared globally. In Europe, we do have a high number of customised strategies but there are also lots of clients who just want tweaks to their trading strategies instead of large-scale customisations.

Overall how have your clients trading patterns changed over the past year?

Liquidity is key in these markets. We have seen an increase in the number of clients using liquidity seeking strategies and using our Crossfinder Plus algorithm that accesses multiple dark pools, including Crossfinder (which is the world’s largest dark pool according to the Rosenblatt Survey May 2012, TABB Group LiquidityMatrix May 2012).

What is the main differentiator from your competitor’s platforms and how do you keep the edge?

Hilton – I think one of the key differentiators is our experience. We have been doing this for the past 12 years and have built a wealth of experience. We also see ourselves as algo specialists. It is difficult business and in today’s environment, the barriers to entry are high. You cannot operate this business on a shoestring and it is important to be able to make significant investments in technology and resources. We are already seeing some firms withdraw from the business or they are sharing the cost with other trading desks.

Do you see volumes returning anytime soon?

Hilton and Cousens – Quantitative easing and other measures will create short-term volume spikes but there will be more bumps in the long term. No one is yet convinced that sustainable volumes will come back any time soon nor do they expect to see a sudden sizeable seismic shift in volumes in Europe. The other issue is that the mix of traders is different. There is a much higher percentage of quant business and much less of the real fundamental trader and that also has had an impact.