FINDING THE RIGHT PATH.

As liquidity fragments and markets stay volatile, it is not always easy to find the right pools. We ask Stephane Loiseau of Société Générale how the bank is helping clients navigate through these difficult times.

Can you please give provide some background to the execution services group?

Over the past four years, we have been putting all our equity products under one umbrella. This includes sales/trading, single trades, block trading, programme trading, exchange traded funds, direct market access and algorithms. We wanted to offer a packaged approach and offer multiple venues for clients to trade on. In effect, it is a toolbox for trading and although they are each different, the common denominator is technology. There is also a strong global focus in that we are covering 60 to 65 markets spread across Europe, the Americas and Asia.

Who are your main clients?

We cater to all institutions – active, passive/index – but in the last few months we are seeing increased activity from private banks. At one time they were considered just retail organisations but today the lines between retail and institutional are blurring.

What has been the impact of the financial crisis on SG and the industry?

The biggest impact has been the drop in volumes, the wider spreads and the lack of liquidity. Figures show that volumes have fallen by about 50% from last year while the bid/offer spread is now three to four times what they were last year.

There is also a different competitive landscape as some market participants have disappeared and there are less players providing capital. Also, there is less activity from some institutions such as hedge funds, which has also had a direct impact on the volumes and the cost of trading. For example, buying 5% of the volume weighted average price flow could be three to five times more expensive this year than a year ago due to the scarcity of liquidity.

As a result, we, along with the rest of the industry, have had to become much more flexible in the way we trade. About 60% to 70% of volumes are traded electronically and technology has become one of the differentiators. Any firm who has invested in the right tools such as smart order routing, algos and DMA is much better placed than those that did not. Clients want to automate the trading process as much as possible in order to access liquidity both quickly and cheaply.

What do you think the impact of MiFID has been? Do you think we will see more MTFs given the current volatile market conditions?

MiFID has definitely succeeded in introducing competition and has allowed the creation of a true pan-European trading platform, which has been positive for the industry. However, there have been far fewer MTFs launched than expected. Some people thought there could be up to 20 but in reality there have only been two to three, including Chi-X and Turquoise, who have made any real impact. I think it will be
even harder this year for new entrants because we are in a low volume market and the primary exchanges are in a good position to capture the flow. For example, the MTFs did not benefit when the LSE had an outage last year and while they have learnt some lessons I am not sure they would benefit today. One of the problems is that there is not that much differentiation between the platforms. The big question they will have to ask is how much time should they allow to attract enough liquidity to be successful. I would not be surprised to see some form of consolidation this year or next.

Do you think dark pools have been good for the market?

I do not think dark pools are for everyone or every order. For example, if you are buying Vodafone, there is no need to use a dark pool but if you are a value investor with a buy order for a high percentage of average daily volume in a small-cap stock with thin liquidity then a dark pool rather than a lit pool may be a better alternative. There is no perfect solution and traders should look at all the options and conduct pre-trade analysis. The questions to ask are what are they trying to achieve and what is the timeframe? Is it a short or long-term investment, and will there be any follow on orders? Also, what are the opportunity costs and information leakage? How long should a trader be prepared to leave an order resting in a dark pool? There needs to be a balance between waiting long enough to see if the order will be crossed with the risk of the order being pinged and as a result, increasing the information leakage, and the opportunity cost of not being represented in a potentially volatile “lit” (i.e. displayed) venue.

What are your plans for the future?

For us the approach has always been to provide clients with not only the products they require, but also the tools they need to measure our performance, and we will continue to build upon our offering. We give them tick-by-tick, real time execution information and we plan to further enhance our post trade data and audit trail. The biggest challenges, of course, are the reduced volumes on both the buy- and sellsides and the market uncertainty. Clients are looking for liquidity and we will provide flexible solutions and more algos that enable clients to adapt to these evolving market conditions.

What do you see as the main challenges for the industry?

I think there needs to be more work in the area of clearing and settlement. MiFID introduced competition in the trading space but clearing and settlement in Europe is still complicated and expensive . It is one of the main differences between us and the US, which has a single provider, DTCC. I believe that a single pan-European clearer would both help market participants lower the total cost of trading but also add volume to the market place.