THE DIFFERENT FLAVOURS OF EXECUTION.

Rob Crane (left) and Mike Seigne (right), co-heads of electronic trading for EMEA at Goldman Sachs talk about offering their clients more choice.

What changes have been made since the financial crisis?

MS: We have been focused on many things, but central to our changes is improving liquidity access for our clients. In the first phase, post MiFID I, it was all about re-aggregation of venues. Now it’s more about changing how we offer execution services to help address fragmentation of liquidity resulting from different business models or execution silos. One of our key strengths is our ability to move quickly. We have reacted to meet our clients’ demand to offer a new set of options to better service their execution needs. Now, clients can have a single point of contact or a fully segregated service for their different trading requirements. The goal is to put the choice in our clients’ hands whilst being both skilled and technically able to deliver execution excellence across the board.

RC: As a firm we are strong believers in maintaining specialisation and not just offering a homogenous execution model. Many clients really value expertise and detailed, in-depth knowledge, others are happier with a single point of contact, and some are somewhere in between; we are now able to cater for all.

As a result of these changes, how different is the role of the sales trader today?

RC: In the past, the sales trader focused on directing highly relevant stock and market information to clients and managing a predominantly manual order flow. Now, they still deliver the content but also act as the conduit between all Goldman Sachs has to offer and how those products can be tailored to a client’s specific needs. The buyside now have much better tools and access to advanced execution algorithms, but the sales trader in many ways has become more relevant in the trading process. Now, more than ever before, they are really able to differentiate the liquidity in terms of where it can be traded, sourced and negotiated.

MS: We have done a lot of work to empower our sales traders with more execution-specific information and if you look at how we now deploy our traders, we have a heavier concentration in areas where clients have told us they most value their expertise, such as emerging markets or mid-cap stocks.

Has regulation been one of the biggest challenges?

RC: We broadly support the objectives of the various regulatory reform initiatives that are on-going in Europe and elsewhere. Of course, there are implementation challenges that the industry is experiencing more generally, in particular as further regulatory provisions are clarified and as relevant implementation deadlines approach. One of the biggest challenges for us is managing the broader resources needed to get these various implementation projects defined, such as the compliance, legal and operational teams as well as communicating these changes to our clients – often in a short space of time.

What impact do you think the proposed caps under MiFID will have on dark trading?

MS: The brokerage community and our clients believe there is value in non-displayed liquidity and unfortunately this message has not been articulated clearly enough. We are concerned that the proposed caps on the reference price waiver will have a negative impact on the ability of our clients – which include asset managers, insurers, and pension funds to achieve best execution on behalf of their stakeholders.

RC: One of the most important benefits of non-displayed liquidity is that it can be a more cost effective way to execute an order. For example, if you are an institution with larger orders you may benefit from pre-trade protection which is best achieved by using non-displayed liquidity sources, either through an electronic channel or a traditional single stock desk. If this option is no longer available, the end client may experience a material reduction in execution quality.

Do you think that best execution has improved over the past six years since MiFID was launched?

RC: Best execution is still a nebulous term, in so far as it is defined by the organisation that is doing the executing. It is all about having a policy and procedure. The more interesting question is whether the quality of execution has improved and I would say it has for a subset of orders in terms of the implicit trading costs falling. However, I think we still have a long way to go in post-trade efficiency regarding the clearing and settlement side of things.

MS: Fragmentation is still challenging for institutional players. There may be more ways to trade – electronic, cash, programme trading, agency broker models etc., – but orders placed with brokers to execute are typically smaller and it can be harder to find the other side. We try and help clients who are liquidity challenged by offering them more choice in how we can deliver our execution service.

How do you think the debate about high frequency trading will evolve?

RC: I’ve still yet to see an effective definition of what actually constitutes “HFT”. It can range from market making to quant trading to more aggressive arbitrage strategies, with various other flavours in between. What I think is most critical though is to ensure that at the venue level, all parties get equal treatment in terms of market data, functionality, special order types, etc.

What other trends are shaping the industry?

MS: We are seeing a move on the part of some of the more bespoke or regional broker dealers to outsource their execution infrastructure. For example, they are turning to us to provide them with a smart order router or a suite of algorithms. This is being driven in part by the increasing complexity and number of regulations, which makes it prohibitively expensive to build and maintain high quality execution. You also need to be flexible and able to react dynamically to changing market conditions and this requires significant and continuous investment.