FINGER ON THE ELECTRONIC PULSE.

Steven Wood saw the handwriting on the wall and began changing the way Schroders executed its orders. He tells Best Execution why the firm has adopted a much more proactive stance.

What changes have you implemented since you joined Schroders?

I joined Schroders seven years ago and I was given a remit to restructure the business. To that end, we implemented a strategy that relies less on the traditional broker-dealer model and more on electronic trading whether it be through algorithmic trading, dark pools, crossing networks or DMA (direct market access).  The dynamics have definitely changed over the past few years and we are doing much more low touch business ourselves versus using a broker. Technology has meant that although we have cut the global trading team to 23 from 55, we are doing three times as much volume.  We have also upgraded the quality of the buyside trader who needs different skills than in the past. Their main objective today is to identify best execution from a multitude of venues which has helped us keep our transaction costs down. They are no longer order takers but need to have skills and expertise to work those orders in the most cost effective way.

How many offices do you have globally?

We operate a hub and global approach in order to source the best pools of liquidity. We have trading desks in London, New York, Singapore and Sydney. We recently closed our Tokyo trading desk and relocated the trading to our Singapore office and moved the business to Singapore at the beginning of this year. There were a variety of reasons for this. Singapore has a large fund management community, a deep talent pool in expert traders in traditional and electronic trading plus people seem to prefer living there over Hong Kong.

What technology do you use?

We run separate order management and execution management systems. The EMS is a broker-neutral system from ITG called TRITON, although we tend to use about eight to ten brokers on this platform in London, more in New York and Singapore. The challenge is to choose the ones with the best algos. I keep abreast of the latest developments by trading programmes myself. I believe that is the only way to see how the technology works.

As for the OMS system, we implemented an off-the-shelf product from Charles River across multi-asset classes. The pace of change in electronic trading has grown exponentially and one of the main attractions of the Charles River system is that we can plug and play new EMS’ for DMA and algos via FIX protocol without having to wait for the roll out of new products which typically can take one to two years.

How has your increased use of electronic trading changed your relationship with your brokers?

I see our relationship more as a partnership than it was before, especially with commission sharing arrangements. We talk to our brokers in a much more focused way and are much more assertive in what type of products and services we want. We also drill down in much greater detail and send them questionnaires asking them about the quality of their smart order routers. Every broker says they have the best smart order router but not every smart order delivers what it promises. We want to know whether it does what it says on the tin. Is it perhaps biased towards one market? Does it touch all markets that it promised etc.

This micro management has had a significant impact on the role of the sales-trader. In the past, we would have given him an order and he would have come back to us every 15 minutes with an update. Now we get that information electronically and see the quality of execution. I look at the sales-trader today as a solution provider, which is challenging for them. If they do not supply us with the right solution, then we will trade the order ourselves.

What effect do you think MiFID has had on the industry?

I think it has been one step forward, for example, with the increase in MTFs, dark pools and more competition for the prime exchanges, but two steps backs when it comes to say trade reporting. Dark pools in general are a positive because they add liquidity to the overall market and minimise slippage. The quality of market data, though, has fallen in certain areas and this is having a direct impact on transaction costs. For example, if a broker receives information for a risk price on a program trade that is tarnished, that will widen the price. This will be one of the things that the CESR (The Committee of European Securities Regulators) will have to look at in its MiFID review next year.

Do you think that the directive has made any impact on your business, as you were moving towards electronic trading long before the directive was passed?

From a trading perspective, it has had little impact on our business model because we were moving in that direction and taking advantage of the different pools of liquidity that were already in the marketplace.  Also, fragmentation is not an entirely new concept. Look at trading BP. The stock is on over 10 exchanges with good liquidity in New York, UK or the European prime markets. The difference is the technology that is being used but even there you have to be careful. We want to know how they worked the order and which liquidity pool they sent it to.

What benchmark do you use?

We use implementation shortfall (IS) because I think VWAP is just a measure of mediocrity. IS, on the other hand, is a much more aggressive measure of the actual cost. It allows you to measure the costs of the trade from the moment it hits the desk through to completion, allowing us to evaluate the cost structure across the history of that trade from trader timing to market impact. In the short term, we can evaluate how we react to changes in market circumstances, while in the long run, it forms the basis for a change in trading strategies.

What trends do you see in the future?

Algos and DMA have become commoditised over the past three to four years and I think we will see the development of customised, bespoke products to access the marketplace. This will give the smaller boutiques opportunities to capture more business especially under commission sharing agreements, where a portion of business will be increasingly directed towards them.