Magazine Issues » June 2009

BUYSIDE TRADING 3: the perfect scenario

Axa IM's centralised dealing desk has freed its traders to support fund managers with ideas. Technology, too, is liberating, but Paul Squires says there is much hype around the numerous applications. By Nicholas Pratt

paul_squires.jpgWhat is now Axa Invest Management’s equity trading desk began life in 1996 as the UK desk for Sun Life Investment Management, prior to its acquisition by Axa. Previously fund managers had executed trades themselves, but they wanted duties to be more segregated, says Paul Squires, head of trading at Axa Investment Management.

The desk started initially trading on behalf of the portfolio managers covering the UK, then Europe and then the US & Asia. Axa also had the same arrangement in Paris, Amsterdam and Frankfurt, so in 2001 the decision was taken to centralise all equity trading in London.

“For me this is the perfect scenario – to have all nine equity traders together, segregated from fund managers, and able to share ideas,” says Squires.

Squires’ team has since expanded beyond equities to include additional asset classes. “It was suggested in 2004 that we start trading fixed income as well as equities so we added a team of three fixed income traders who had all previously traded other asset classes. There was some initial hand holding by the portfolio managers for the first six months, but it has subsequently been the best rollout we’ve had.”

In the time that the in-house dealing desk has existed, the role of the buy-side dealer within the firm has come full circle, says Squires. “Back 13 years ago the fund manager would send the order and we would do it. The job was 98% doing the deal and 2% checking the market and filtering market news.

“There is much more market insight now. Hedge funds have driven that. They have given brokers the incentive to come up with more ideas and it is the same with us and our relationship with fund managers.

“Now our job is a 50/50 split between doing the deal and commenting on the market. Ultimately I think we now help fund managers to make investment decisions.”

A number of dealing desk heads talk of the struggle they face to help fund managers understand the value of dealing and the frustration they feel when a failure to understand the mechanics of the process creates extra work for traders. However, Squires accepts that dealers have to show humility.

“The fund managers are the ones that bring in the revenue, they are your client and you have to know your client. They are all different and not all of them are aware of exactly how a trader makes intra-day savings and are perhaps oblivious to all of the stress that we’ve gone through to execute their order. But there are also those fund managers that know exactly how trading works and they are very easy to work with.”

Advances in technology
The last 13 years has seen enormous change in terms of trading technology. But just as there is a wealth of market news that has to be filtered, another of Squires’ tasks is to discern what products are of genuine benefit and what products are merely distractions. “We are very technology-focused but there is a lot of hype around many of the technology-based issues and products. Slippage, basis points, milliseconds of latency – it is right to talk about these things, but there are so many more important things,” says Squires.

“We do use an algorithm and we love the one provider that we use but that is sufficient because many of our fund managers are actively managing their portfolios and there is only a small amount of indexed funds. We also transmit most of our equity trades (roughly 90%) through FIX and we have good crossing rates with the electronic communication networks (ECNs) for our straight-through processing. But even with all of this, I still insist that my traders use the phone every day and speak to their brokers. I still think that brokers are important.”

The brokers’ role and the size of their fees have come under close examination by traders in the post-MiFID era and its promise of lower execution costs. “Brokers have driven down the cost of their own trading but we are still paying them the same commission rates even if we use an algorithm or trade on an MTF like Chi-X,” says Squires.

“In an ideal world the commission would be based on where the trade is executed but this is hard to do. We have had unbundling which is good and which should be the answer to that segregation in economic terms between research and trading commissions. But we still have fund managers that have important relationships with brokers based on their research and that remains a driving factor.”

The promise of lower execution costs has primarily been based on the deregulation of Europe’s marketplace and the increase in sources of liquidity, but this dispersal has created an additional burden for dealing desks in terms of tracking and aggregating all of this liquidity. “We cover the bases in terms of execution venues,” says Squires, referring to the algorithm Axa uses (AES from Credit Suisse), which has access to all multilateral trading facilities.

The dark side
However, new venues are emerging all the time, particularly the so-called dark pools, a tag which Squires is somewhat wary of. “In the past, sell-side traders had lots of information and we had to try and get this information out of them. It was like a game and more of a ‘dark pool’ than anything we are seeing now. I think the mass of dark pools we see now is just available liquidity that was always there.”

Furthermore, there has so far been little aggregation of dark pools, although a number of operators are talking to each other. “I think they realise that there needs to be some kind of consolidation because we don’t want to have to deal with too much more fragmentation,” says Squires. “It is, in many ways, unhelpful for us because we have to accommodate multiple venues. We stick an order into a smart order router and get 1,000 fills.”

One possible solution lies in the use of crossing networks – the trading systems that electronically and anonymously match buy and sell orders without the need for an exchange.

But, says Squires, there is still some reticence among buy-side dealers due to the failed attempts at establishing crossing networks in the past. “If six heads of dealing decided to put all of their orders into something like Liquidnet [a crossing network], it would work. But for some reason we never quite get there.”

What prevents a massive take up of crossing, he feels, is the perceived problem of gaming. “There is still that worry about being exposed to gaming, which seems to prevent full participation.”

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