Fabien Oreve, Dexia
Fabien: Dexia Asset Management is an asset manager which is involved in fundamental,
quantitative and alternative investments. We have three management centers in Europe: Brussels, Luxembourg and Paris, and one location in Australia, in Sydney. We are permanently adapting our activities to deliver performance from investments to execution.
Adam: What sort of assets are we talking about here?
Fabien: Dexia AM manages 73 billion euros. I may say these assets have stabilised over the past few months, which is a real achievement given the difficult period we face in financial markets. So now we have much of our focus on key teams. We've invested in them to make them more efficient, especially the trading desk. That's something I've been working on. We have gradually reorganised our trading desk to make it truly a multi-asset desk.
Adam: As a traditional asset manager, I suppose there's a heavy concentration on equities and fixed income. But you do everything?
Fabien: Yes, we do almost everything in bonds and equities, but historically the main assets managed by Dexia AM have been bonds and this is still the case; equities is second. We are doing pretty well in Europe, our core market, but we are also invested in emerging market bonds and equities. We have also quantitative funds that are invested all over the world. We have a multi-asset allocation team based in Luxembourg; fixed income and equities is mainly managed from Brussels and the alternative arm of our firm is located in Paris.
Adam: I'd like to back up and talk about some of the themes you're seeing in the market, in terms of services for asset management companies. Everywhere you go you hear about how different segments of the market are under pressure.
Fabien: Dexia AM has not seen a decline in the quality of services we are getting from brokers. But I think more brokers are concentrated on, or thinking about, their long-term relationships with us as they know we are committed to delivering top performance. And they know that we are trimming broker lists, too. Another thing is, we have recently asked for brokers to evaluate their profitability with us -- not over one year, but over two, three, four years - because we think that things have to change and brokers are more partners than brokers as we used to have 10 or 15 years ago. And they are much more focused on providing tailor-made research, providing executions where the sales traders concentrate on difficult orders and source liquidity using algorithmic and voice trading. I do believe that everything cannot be, or should not be, traded electronically.
Adam: Where are you in terms of automation?
Fabien: Before going into automation, it is very important to clarify the role of anyone involved in the execution process to see - based on TCA and statistics - what would be the most optimal combination of automated tools and human trading which we think brings value to the execution performance? Clearly on the equities side we mostly trade our orders with brokers, but now we trade increasing flows in algorithms. This automated activity that we handle ourselves in equities is restricted to small- to medium-sized orders, where we think that brokers do not add any value. So we have defined different criteria, below which any flows go to algos.
Adam: You design them yourselves?
Fabien: Basically all algos from the biggest providers have their own standardised risk components. On top of that, we are required to add our own criteria or binding rules to make sure that risk is minimised, but also so that algorithmic trading fits our execution process. So the traders who use algos feel more comfortable because they know that if it happens that they send an order that is not eligible for algorithmic trading, the order will be rejected or there will be an indication on the screen that the order is not acceptable.
Adam: And that's usually a question of size?
Fabien: Yes, we have limited the order size to the nominal value of 2 million euros. We also define criteria regarding ADV, so everything that is above 3% ADV goes to high-touch trading desks. Also, we have restricted the countries where we trade with algos. And today, no algos we use ourselves can execute outside a range of 1% versus the arrival price.
Adam: Is there an argument to be made that you could get more value by using algos for some larger orders?
Fabien: The thing is, the way we have structured our execution process is that it leaves some room to trade with local brokers. This is something that should be exploited to help manage large-sized orders.
But I take your point. We know that with some crossed networks it makes sense in the array of tools that we should use. But today, my priority is to structure our execution process and make my clients think about what is an easy order and what is a difficult order. An easy order should be automated and a difficult order should be handled very carefully. This is maybe the reason why I prefer to separate both, to make my equities traders involved and very committed, to concentrate their time on the difficult orders without using algos.
But if we grow, we may consider other tools. We could consider increasing the criteria - eg going from 2 million to 5 million euros, going from 3% to 5% ADV - while staying focused on six or seven European countries where we are more familiar and trade the most volumes, and then keep trading three or four countries or those outside-Europe countries with brokers.The point is to build up this desk, step by step. I don't want to change all rules from today to tomorrow. It's very important that this massive change we've had for the last two years, since I joined the company, would be well accepted by my team, and that the move to automation would be gradual and would evolve their work without completely changing it. We have already noticed some cost efficiencies. We've seen better results in our TCA. We measure most of our orders intraday, via implementation shortfall, so now we can see that transaction costs are at a very reasonable level and that's one of the reasons why I'm not going right now to the very popular tools like the one I mentioned because the desk is working pretty well now.
Adam: What are the percentages like in terms of automation? You said you joined two years ago. How much has it increased during that period?
Fabien: Two and a half years ago, automation in equities was zero.
Now we trade below 10% of our flows in algos, but my target is to reach 25%. You may argue it's still a minority share, but don't forget that it includes program trades. We trade lots of programs at Dexia AM, especially for quantitative-driven clients or asset allocation for example. When they change strategies there are a lot of flows coming into the desk.
And I do not think program trades should be automated by ourselves. That should be handled by the brokers because PT for me is a typology which requires a lot of skills as well as sophisticated, stable and high-capacity trading tools. Program trades need a mix of high-touch and low-touch. And also, the synchronisation of execution needs derivatives sometimes to get it done.
I've been in PT for 10 years and I know that business requires proper, dedicated teams. On my desk, we need to focus on the trades we can automate when we know we are able to do them ourselves well.
We don't trade PT with just anyone. We selected a few PT specialists where we interact with them. So it's semi-automation, because we check out the results in real time on our OMS/EMS, and we get involved in the program as it is traded. I'll just give you an example. If I trade a program on the market close, and if for any reason, like a technical reason, the trade is not done at the close, it would be very difficult for me to justify having a position and taking on the responsibility.
We have - surely you've guessed it - a very conservative approach to automated trading in equities. But I want to gradually increase my automation in equities, restricting it to cash orders, where I think automation brings value, especially on the small to medium segment. PT is something I will probably keep as is.