STAYING THE COURSE.

The financial crisis has put the whole industry to the test but Paul Squires explains why AXA’s integrated platform helped them weather the turbulence.

When was the trading and securities financing (TSF) group established and what was the rationale behind it?

TSF was created in 2006 to take advantage of the synergies between the two divisions but also to bring a seemingly opaque operation – securities lending – into the mainstream. The two activities are clearly segregated both operationally and in terms of the governance structure, and there is a solid Chinese Wall between the two. The division has 25 traders across three asset classes – equities, fixed income and foreign exchange. The AXA trading operation has evolved into a fairly sophisticated trading desk which uses algorithms and smart order routing, with traders in close proximity to the fund managers. We believe this relationship is one of the keys to us being a successful operation.

What has been the impact of the financial crisis?

Liquidity was left behind. It dried up and risk capital disappeared. Traditionally it was larger brokers who would provide this type of instant liquidity but post-Lehman, they could not afford to take these positions. Also, there is potentially more market impact and opportunity cost than before because the lower volumes in today’s markets mean that your trade has become a larger share of the whole and this can be very expensive.

What role did technology play?

Technology and liquidity are often put together but although liquidity is very important it is only one part of the equation. We have spent a lot of time and money building our infrastructure and have a wide range of tools to access liquidity across multiple venues. However, the human touch and expertise should not be underestimated. This is especially true in the more illiquid stocks such as small caps. AXA Framlington, for example, has a significant small cap business and they rely on their brokers’ experience and access to flow.

The way we work is that we have relationships with crossing networks such as LiquidNet, a few brokers who do much of our liquidity seeking as well as relationships with other brokers who provide us with a range of different services. It is because of these relationships, for example, that we are able to get capital commitment when it is not readily available in today’s market conditions.

In many ways the financial crisis has eclipsed MiFID which had been the big story before the Lehman collapse. What have been the outcomes?

The financial crisis was much more significant than MiFID. It was an extreme situation and all of a sudden, overnight, buyside traders were much more focused on credit ratings, counterparty risk, collateral positions. This was not the case previously. Also, some of the players had disappeared and the people you spoke to 15 times a day were gone. As a result, service took a hit and I do not think that it has returned to the levels that it was before the crisis.

As for our business, it made us rethink how we executed orders because the volatility was so extreme. Also, the scope of what we are doing has broadened. We are providing more guidance and analysis for clients on issues such as counterparty risk.

What was the effect of the financial crisis on the stock lending side of the business?

The financial crisis has had a major impact on our stock lending business because after Lehman’s, collateral positions had to be transacted in order to return assets to clients. It was a huge and intense undertaking that consisted of laying out spreadsheets and manually reconciling positions. It also involved a series of phone calls to clients to ensure that they knew the situation and what our strategies were. I think one of the reasons we were successful is that we are centrally organised and had the infrastructure and strong collateral management in place which allowed us to deal with this situation. If we had remote departments that we had to co-ordinate it would have taken twice as long.

In general, how has MiFID changed the European trading landscape?

There is no doubt that MiFID has caused fragmentation. There are currently 12 venues in the market but our experience shows that only a handful of them have meaningful liquidity. I think there will be consolidation but the most important factor to us is who has the liquidity and whether we can access it. Typically buyside firms do not have the infrastructure to sign up to all these MTFs so consolidation in the industry would be seen as a positive move.

Another outcome has been the lack of visibility in trade reporting. We get information from Boat, Chi-X, Turquoise and the primary exchanges but they are each structured in a different way. In some cases, it is hard to determine who is doing what on certain venues. Also, while there are third party providers who can offer us a breakdown of the data, it is not only inconsistent but also takes a long time to be delivered. As a result, the information is not credible or a reflection of what is actually going in the marketplace. What I want when I am trading is to have the information readily available and in a consistent format.

Benchmarks continue to be a popular topic of conversation. Which are the most popular today?

We prefer using implementation shortfall but it depends on the investment strategy and the type of fund manager you are trading for. For example, VWAP is still popular among low touch, high frequency quantitative firms. However, those working more difficult, larger orders may opt for a more sophisticated approach. Most of our activity is for fund managers who are taking a long-term view based on fundamental research, so we are in a different category.

Do you think MiFID will apply to fixed income?

MiFID generated a great deal of discussion around fixed income but as there is no central order book there were no conclusions. We are a genuinely multi-asset class firm but most of the buyside dealing desks are equity based and there is an imbalance between equities and fixed income technology. I think there needs to be more done in this space. What we have done is in-sourced a lot of data and aggregated price information from our main counterparts in order to create our own order book.