- Toby Bayliss, Head of Execution Electronic Sales, Europe, Citi
- Scott Bradley, Head of EMEA Electronic Client Solutions (ECS) Sales, JPMorgan
- Rob Maher, Head of AES Sales in Europe, Credit Suisse
- Philip Slavin, Head of European Product Strategy, Fidessa
- Kyle Zasky, Managing Director and Co-Founder of EdgeTrade, a Knight Capital Group subsidiary
What do you see as the most important individual virtues that the buyside looks for when selecting electronic execution services?
Bayliss: The increased focus placed on
performance quality and the need to justify trading decisions has
encouraged the buyside to place far more emphasis on the detailed
way in which electronic execution providers source liquidity and
demonstrate best execution. To achieve this goal the buyside
demand liquidity that is sourced from all venues, including all
exchanges, MTFs and interact within the sellside's proprietary
crossing network. The level of service and trust in the
relationship continues and will remain a key component.
"...over the last two
years the requirements
of a sophisticated buyside desk and those of a sellside desk
have become more aligned."
Bradley: There is more to the decision making
process when looking to select which electronic client solution
provider to add to the blotter than just "are the boxes being
ticked". Of course, if there are gaps in the offering, which
would disadvantage the client in achieving best execution, then
the broker will find it difficult to justify their place at the
table. An extensive product offering with access to alternative
trading venues and dark liquidity pools is becoming the standard
across the major providers. However, the importance of a fully
functional and experienced service model to support these
execution product offerings is becoming of greater importance in
the decision process. With the evolution of algorithmic
strategies continuing to progress and as more business is
becoming self-directed with more commission dollars being spent
on these execution channels, the buyside demands that the service
and coverage levels for their flow matures accordingly. The
ability of the broker to provide an experienced and value added
coverage model is becoming an increasingly important factor as is
the ability to deliver bespoke solutions to meet the ever
demanding requirements placed on the buyside dealing desk. With
cost no longer a differentiator between providers a more holistic
approach to decision making is taking place.
Maher: Breadth of product - asset classes, global reach, types of algorithms. Depth of experience, robust coverage and support. Accessibility - the ability to access the execution suite via the tools they already have on their desk.
Slavin: Electronic execution solutions were born from a need for workflow efficiency. Although the competitive advantages that the early adopters gained are being slowly eroded, the demands are growing at an alarming rate. Offerings now need to offer multi-asset, multi-broker, multi-region and multi-service (DMA, Care, SOR and Algo) all in an integrated, easy-to-deploy solution. This is no mean feat and the associated issues should not be trivialised.
Zasky: The buyside looks for a value-added execution partner that can offer access to natural liquidity, robust technology and infrastructure, scale, and technical and quantitative expertise.
What do you see as the major competitive differentiators for electronic execution services over the next two years?
Bayliss: Performance will become the key
differentiator. This will be driven by the quality and level of
liquidity within broker crossing networks and the ability to
access all major trading venues.
Expanding the depth of the product offering to cover new markets and increase the offering across multiple asset classes. Increasing the sophistication of portfolio level strategies to manage the portfolio risk incorporating optimal multi asset hedging strategies.
Maher: Access to liquidity - seamless
integration of as many light and dark liquidity destinations as
possible. Sophisticated smart order routing - it is absolutely
critical to have fast, sophisticated smart routing across venues
as liquidity fragments in Europe post-MIFID.
Slavin: The quest for screen real-estate challenges the broker sponsored solutions and favours a more broker-agnostic approach. This is countered by the value added services that innovative providers can offer. For the best of both worlds you should be looking for a reliable, multi-broker platform that can be rapidly deployed to maximise the take-up of new services like multi-asset algorithms, pairs and program trading support.
Zasky: Continued evolution of smart order execution algorithms; multi-asset, broker-neutral trading and; connections to major sources of liquidity, displayed and non-displayed, in key financial markets globally are main differentiators being heralded now, and will remain strategic priorities over the next two years.
Do you feel that the evolution of electronic execution services has become increasingly buyside driven?
Bayliss: Without clients our business does not
exist so it is essential our products and services remain client
driven. However over the last two years the requirements of a
sophisticated buyside desk and those of a sellside desk have
become more aligned. As the buyside become ever more explicit in
their demands their influence in the way in which the products
are driven forward becomes ever more significant.
Bradley: The involvement of the buyside in the development and evolution of electronic trading services is key in making sure that what is being delivered actually meets the demands and trading requirements of the most important users - the client. Traditionally the capital spent on technical research and development has been invested by the providers and there was a lag period before the buyside gained access to new tools and execution strategies. With the increasing importance of bespoke solutions and customer service the requests of the buyside are right up there on the priority list. The ability and reduced turnaround time for electronic service providers to meet such demands is becoming a major differentiator so therefore one could put a case forward for suggesting that the buyside are helping to drive the industry forward. There is a symbiotic working relationship developing between both provider and end user which will continue to push the sellside into finding additional avenues to increase efficiency and add value which can only be considered a good thing. Whilst this lag between the buyside trader and ECS (Electronic Client Solution) provider exists there will remain the absolute necessity for a good algorithmic broker to educate the client on how to best realise potential from the product offering. To this degree, the balance of power still resides with the sellside but perhaps not for much longer.
"Access to liquidity is the
key to delivering best execution under MiFID."
Slavin: 'The client is king' is hardly a new
concept and as the buysides become increasingly more demanding in
their trading needs and better able to measure poor performance,
sellside institutions across the globe are having to step up to
the plate or risk being marginalised. Given that attracting flow
is the primary incentive for electronic execution providers this
is not an acceptable proposition.
Zasky: No question about it. Empowered buyside traders are a primary driving force for innovation in electronic execution tools and services from the sellside.
Is greater cross-accessibility among brokers' dark pools an inevitable part of electronic execution services' evolution? And to what extent do you feel it will become a competitive disciminator?
Bayliss: The cost to the buyside of splitting
orders across multiple broker dark pools creates additional
implicit and explicit costs. Explicit costs rise as a result of
settlement costs and the requirement to settle different shapes
with each individual broker. The implicit cost of not being able
to have your whole order residing in each of the dark pools
simultaneously can lead to missed opportunities. The buyside
demand for the linking of broker pools is so strong that it an
inevitable part of the market evolution and failure to do this
will only reduce the effectiveness of the execution.
Maher: We will access all meaningful liquidity venues including other brokers' dark pools if they are made available. Access to liquidity is the key to delivering best execution under MiFID.
Slavin: Accessing dark pools as part of a primary trading strategy is in the early adoption stage in Europe and currently concentrated into a relatively small number of brokers. Although partnerships are being widely discussed in practice there is a hesitancy as the proliferation implications (as witnessed in the US) are not seen as an optimal operating model in the European marketplace. Best practice will prevail and, like any other liquidity solution, will run through a typical adoption lifecycle.
Zasky: Interconnectivity among dark pools is essential and makes practical sense when looking at it from a buyside trader's desire to source all available liquidity and obtain optimised execution performance. Exclusionary dark pool providers will soon discover that keeping others out, for whatever short-term business gains, is not going to work in their best interests over the long-term because the overwhelming trend is to open, and not close, access to liquidity.
Is there a point beyond which further customisation/configurability of execution algorithms becomes self-defeating in terms of productivity? And are we anywhere near that point yet?
Bayliss: A correctly designed and implemented
flexible suite of algorithms will address the
requirements of almost all client demands. The added value comes from ensuring that all parameters, available to users and those at the back end, are understood and utilised in a way most appropriate to the client's style of trading.
Bradley: As long as customisation and development continues to add value to the execution process then the industry will see new strategies and features. There is a danger that over customisation for the sake of "new improved" status can be seen as nothing more than a marketing exercise. As new products and algorithms come to market there is often a lag phase as it takes time for these to be fully integrated into the working routine of the buyside trading desk. Moving on to the next generation of customisation before there is a full understanding of the current offerings could lead to the end user continually playing catch up and never actually fully receiving the benefits of the tools already available. Quality of customisation rather than quantity remains key. We are currently seeing a shift in product development towards providing customisable tools which aid the navigation through an increasingly fragmented landscape. As the post MiFID landscape takes shape this is where there is room for further development to enhance productivity.
Maher: We've always tried to take a modular approach to the development and distribution of our execution strategies. The ability to quickly piece together various parts of our algorithms to fit a specific client need is a key component of our business. So long as there is diversity and variation amongst our clients, customisation will be essential.
We don't see this declining any time soon.
Zasky: Apart from highly quantitative buyside shops that will continue devising proprietary strategies internally, we maintain that from a productivity standpoint it isn't in the best interest of the majority of users to customise algorithms on their own. That work is better left in the hands of quantitative experts on the sellside who can work in collaboration with a buyside trader to deliver the most appropriately configured strategy to achieve a very specific trading objective. On the whole, there are more incremental improvements to be seen with execution algorithms; we do not think an upper limit has been reached with respect to customisation and configurability. The state of the algorithm, at present, isn't so perfect that further investment in advancing these technologies is superfluous.
As the buyside becomes increasingly at ease with tools commonly provided as part of electronic execution services and potentially start to develop their own, is there a serious risk that existing electronic execution services providers will become disintermediated?
Bayliss: The question every buyside has to ask
is whether the added expense can by justified by cost savings or
potential performance improvement. There is only a very select
few buyside firms with the budget, infrastructure, knowledge and
desire to develop their own strategies. The economies of scale
are clear as many mid tier brokers struggle to keep up with the
significant demands on resources to connect to new venues and
implement new strategies.
Slavin: As buysides take greater ownership of
the execution decision and intellectual property migrates away
from the sellside institutions, we see a growing desire and
capability to build in-house solutions and reduce the reliance on
electronic execution providers. These in turn are reacting by
evolving to yet another level of service provision to continue to
attract flow. However, whilst the bulge bracket firms have the
capital to continue to invest in this level of evolution, smaller
players are looking to niche/ boutique services as their USPs.
Zasky: We do not see a serious risk of disintermediation, because established and qualified advanced execution service providers offer a high value proposition to the buyside in terms of scale and competency. A majority continue to rely on the sellside, freeing them, the buyside, to focus on their core expertise: the investment management process.
Are buyside expectations of the extension of electronic execution services products into lower volume markets realistic, given the costs associated with developing products specifically for those markets? Is the volume threshold for these markets too low to make the development of specialised electronic execution services products commercial viable?
"Whilst illiquid models are in vogue, they lack pedigree and suffer from limited take-up as users simply do not understand how to engage with them."
Bayliss: When connecting to low volume markets
the initial revenue forecast of developing electronic execution
products does not always create the most compelling business
case. However an expanded offering improves the overall
experience of the global product which is far more difficult to
quantify. Allowing the user to enter global baskets with
confidence so that orders in the less developed markets will not
be rejected encourages overall utilisation. Assuming a reliable
connection and quality real time data can be provided many
algorithms can be transferred across to other markets with
limited modification required.
Bradley: A few years ago we saw the emergence of "small order" execution strategies and algorithmic solutions to trading the lower mid to small cap securities. This was a natural progression as the universe of stocks which can be traded on the screen increased accordingly and visible liquidity in these securities improved. The fundamental building blocks for these strategies leveraged the work already developed within the incumbent models and added a heuristic layer of automated decision processing. It becomes a self-fulfilling scenario as more providers look to offer solutions in this space and so therefore liquidity increases. The post-MiFID emergence of alternative liquidity sources allows for the further development and next generation of strategies aimed at stocks which were once regarded as being unsuitable to trade in an algorithm. The costs associated with such strategies are focused more towards the sourcing of hidden liquidity rather than the development of on-exchange execution.
Maher: Over the last several years, the development and adoption of strategies for trading less liquid stocks have been amongst the most important and well received. These strategies will only become more effective and efficient as new order types and dark liquidity pools gain traction in Europe.
Slavin: Whilst illiquid models are in vogue, they lack pedigree and suffer from limited take-up as users simply do not understand how to engage with them. Whether this is a self-fulfilling prophecy, whereby once one person uses them then everyone needs to, or will lead to gaming, as human traders spot the model's trading patterns, is a moot point and has impeded the level of investment in this space.
Zasky: The extension of electronic execution services into lower-volume products and markets is inevitable. These technologies, if properly developed, will have a strong value proposition, whether applied to thinly traded equities or other asset classes with low volumes, and ultimately they will become a necessary part of a complete electronic execution offering. I do believe that these lower-volume products can be commercially viable if you take an approach like FedEx, whose business model requires delivery to all destinations. While the volume of packages to one small town may not be profitable, the cost of such lower-volume markets is offset by the high delivery volume in larger cities. Likewise, I believe it's smart to provide the widest variety of choice and trade every name effectively for your clients, not just the highest-volume securities.
"...people run algorithms and
not the other way around."
Do the majority of buyside traders now accept that algorithms are a productivity tool rather than a threat to their employment?
Bayliss: Many buyside traders now feel that
algorithms empower them rather than being a threat to their
employment. Algorithms provide buyside traders with far more
transparency and control of their own executions.
Bradley: The Electronic and Algorithmic trading industry is very progressive and with all innovation there comes a degree of scepticism in the early stages.
The importance of the role of the sellside in educating clients on the merits of utilising such tools has been further strengthened by the improvements made in measuring tangible performance improvements. As buyside productivity increases we are not necessarily witnessing a decline in the number of dealers, however the quality of execution continues to refine. The appropriate use of execution algorithms allows the focus and expertise of the trading desk to concentrate on adding value to those orders which require attention and the algorithms can be left to do what they are designed to do…work as dutiful trading assistants. The buyside should be cautious of claims that "there is an algorithm available to meet all of their execution needs, this is not always true. There will remain the need for the human element in the execution process especially as the market landscape continues to evolve and we face continued volatility. In general this has become widely understood and accepted and the use of algorithms as a productivity tool will become
further accepted as the effects of fragmentation take hold.
Slavin: As buyside EMS products have matured over recent years, so has the trader's ability to extract maximum performance out of the electronic execution products on offer allowing them to focus on other value-added services. They are definitely embracing this evolution and are more comfortable pushing the frontiers of electronic execution providers even further. Despite this, the man vs machine argument will continue to rage.
Zasky: We consistently emphasise with clients that people run algorithms and not the other way around. They are in control, and an algorithm could not serve its stated goals without a highly skilled buyside trader making the most important decisions and orchestrating how it gets deployed for maximal execution performance.
How important a competitive differentiator is the provision of homogenous cross asset electronic execution services?
Bayliss: A lot is currently said about the
importance of cross-asset electronic execution but the current
reality is that the number of cross asset trading strategies
executed electronically on the buyside is still limited. In our
experience the main utilisation of cross-asset strategies is more
as a hedging tool.
Zasky: It will become a compelling competitive differentiator in the coming years, though realisation of this is premature as electronic trading and algorithms in non-equity products are still in their infancy.