June 2009

BUYSIDE TRADING 2: too dark to trade

Christoph Mast, of RCM, tells Nicholas Pratt there is a need for more data from brokers and vendors if electronic trading is to reach its full potential... christoph-mast.jpgAllianz Global Investors was the first German asset manager to set up its own equity in-house dealing desk back in 1995. Back then, equity trading had become a much more complex undertaking thanks
to the demands of best execution, the search for liquidity, the need to reduce operational risk and a whole host of middle-office issues.

Christoph Mast, global head of trading at Allianz’s equity manager, RCM, says: “Leaving all of that to the portfolio manager would have been a distraction and having trading carried out by a dedicated team has proven to be very positive in terms of performance.”

In 2003 RCM set up a global trading system with three dealing desks in Frankfurt, San Francisco and Hong Kong to cover every time zone.

“In establishing the global desk there were two main issues that we faced,” says Mast. The first of these was to do with technology and was solved by implementing a global front-office tool in all locations. The second issue was to deal with the different regulations for each regional market, something that was navigated by a global trading policy that takes account of the requirements of the different regulatory bodies.

A growing trend
The growth of electronic trading has been one of the most noticeable industry trends. RCM is no different, says Mast, and routes all orders electronically to brokers and has a growing appetite for direct market access (DMA) and broker-supplied algorithms.
Yet the potential efficiencies promised by electronic trading, as well as the explosion of new liquidity sources and execution venues, are being thwarted by a lack of available market data. 

“The key issue for us, as far as market transparency is concerned, is having consolidated volumes and prices,” says Mast. “At the moment there is no industry standard for a consolidated tape in Europe. The buy-side community is on the case and the pressure is coming from the IMA [Investment Management Association, a UK trade body] and other buy-side associations and hopefully we can establish the same kind of consolidation of tape in Europe as there is in the US.”

There is also a need to improve the availability of trade reporting data, Mast says, particularly now that brokers have so many execution options in this post-MiFID environment.

“It is very important to have the right data provided. I would like to see what venues my broker uses for over-the-counter (OTC) trade reporting. How can I be sure that the trade report reflects what has actually happened? What does Bloomberg show? Is Boat data included?”

Too dark
The lack of available data is also evident when it comes to dark pools – the new sources of off-exchange liquidity, which Mast believes would be much more widely used if they were not so ‘dark’.

“With dark pools I want to know what is out there. How do they work and how much is really done in dark pools? Are there any anti-gaming rules? This would help us to see what kind of liquidity is out there.”

During the panel discussions at the recent Trade Tech event involving heads of dealing, the issue of transaction costs analysis (TCA) came up repeatedly. “The ability to compare our trades to everyone else is very important in seeing where liquidity actually is and what has been traded. Most vendors are on the case but they are yet to deliver a product that can provide all the data from all of the venues.”

The increase in the number of venues is a direct result of MiFID, the European Commission’s ambitious directive aimed at creating a pan-European securities market. Although we are less than two years into the post-MiFID area, have asset managers seen benefits? Has MiFID made trading cheaper? “On the one hand we have reduced the cost of execution at the exchanges but actually might have increased the overall cost of trading in terms of liquidity aggregation and smart order routing,” says Mast.

“We haven’t really seen commission costs come down from brokers but it is a difficult time for the broking community and they have seen their profitability eroded. So it is a trade-off between a lower commission pool for the buy-side and a reduction in operating costs for the brokers. We need to have an ongoing conversation with the brokers so that we can finally benefit from lower trading costs at the exchanges.”

And how has the relationship between the dealers and the portfolio managers evolved since the creation of an in-house dealing desk? “The portfolio managers respect our work,” says Mast. “We are given more than 90% of our orders with complete discretion. This suggests that there is a lot of trust there.”

This trust has grown out of the fact that portfolio managers realise that modern trading with its use of modern electronic trading tools is a complex task and not simply a matter of resolving settlement queries. The relationship between dealers and portfolio managers is also helped by the fact that, as head of dealing, Mast has regular contact with the CIOs and is part of both the European and the global RCM investment management groups. “We are all on the same floor and trading is considered as important a part of the RCM value chain.”

Into the future
For the immediate future, Mast is concerned with migrating the trading desk of Cominvest – one of Germany’s largest asset management firms, which was acquired in 2008 by Allianz Global Investors. “Within our trading team we have fostered the relationship between the cash equity and the FX and derivatives traders,” says Mast. “I assume changing the profile of the cash traders to a more multi-asset class profile will be an ongoing task.”

As for the long-term future, Mast expects that the electronic side of trading operations will continue to be important.

“Connectivity, FIX and the use of algorithms were all very big issues in the recent past. In order to secure best execution in the future, issues like developing our own algorithms or developing our own TCA tool might be something to look at. We might also be looking to have even smarter order routers that are intelligent enough to access all the liquidity out there.”

©2009 funds europe

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