I am the responsible Head of Trading running the trading desk as well as the overlay management for Groupama Asset Management. We are trading equities, fixed income, foreign exchange and both listed and OTC derivatives.
I am in charge of deploying overlay strategies to introduce automation, announcements workflow and facilitate activities for PMs. The global overlay desk is a hybrid between trading and cost optimisation, to prepare the execution and manage the generation of orders. This team would for example structure how to best trade FX, futures rolls etc. The overlay is separated from the trading desk with management capabilities taking orders from all entities on the asset management side. It is still crucial for the overlay team to work in partnership with the dealing desk to find; better processes for market intelligence, the liquidity available, data mining strategy and further efficiencies for specific asset classes.
On the cross-asset trading desk we take advantage of having an overview of all our assets, sharing market content and colour and we create further analysis for example around how the market evolves and correlates signals between asset classes. The trading desk is responsible for execution and it has no capabilities of its own to generate orders as that is the sole responsibility of the PMs. The idea is to position our trading desk as a ‘solution and services’ desk for execution and best execution with technology and trading capabilities. The trading team analyse all signals from the market coming from our counterparties. We produce smart analysis for our PMs qualitative input on market colour, positioning, market sentiment, risk by analysing the derivatives market and market timing.
We want to leverage the full value of senior traders for alpha generation in the portfolio management. The ‘alpha trader’ concept is a continuously growing theme within the buy side as we are facing increasing complexity to find liquidity with the fragmentation and we need to deliver smarter answers about the market developments in the short term. To deliver these smarter answers we continuously need to optimise our technologies. It is an interesting job. Some PMs use this smart content more than others depending on the portfolio strategy. The PMs may sometimes have a different view but our intelligence is another tool within their toolbox and it is important for the trading desk to add value outside of just execution and best execution. When the PMs have gained confidence that you have a smart understanding of the market and liquidity sourcing, they give you more flexibility and discretion as they understand that you are doing your best for them.
This is in my view of how buy-side trading desks should evolve. It would be a shame not to leverage the intelligence we have on the desk internally.
How do you perceive the brokers are differentiating with their high touch services, if at all, now 17 months after the implementation of MiFID II? What is the role of high touch trading in the increasingly electronic market with higher levels of automation and crossing solutions for both equities and fixed income bonds?
Starting with equities, the evolution of high touch sales trading is a key question as, the last two years, all the buy side onboarded their algo suites and most of our flow is now traded using algos. With our new technology on the front end, we no longer have the same need for high touch liquidity seeking services compared to the past. Therefore, it is a challenge for the high touch desk to maintain their relationships and stay ahead of their clients with smart advice as they receive less flow than previously. Mid-touch could be one solution for the sell side where they can leverage the algo flow from their counterparties and the buy side can ‘click’ the GUI to empower the high touch desk. This is an interesting solution optimising the capabilities with old-school high touch trading with the latest algo trading. The sell side high touch trader knows their clients and can now advise about how to use the algo suite. The big question is to what extent the buy side will be willing to disclose their algo flows to the high touch desk to offer them the opportunity to source incremental liquidity. The role of the high touch trader is converging into a hybrid role between a CRM (client relationship manager) advisor, as they know the needs of the client and liquidity sourcing by risk facilitation or natural liquidity through their client network. The sell side high touch trader can provide value to their clients with advice on market structure, regulatory changes and to be an entry point as a relationship manager for counterparties. I also see the possibility for the sell side to add value to the buy side with more general consultancy, outside of day-to-day trading, as we have less interaction with their people due to the high level of algo trading. It is crucial for the sell side to maintain the understanding of their clients in terms of evolution, positioning, risk request etc. I think the high touch desks could also play a bigger role in the allocation of risk to their counterparties. They could be in charge of risk allocation helping to allocate balance sheet for their client’s specific challenges.
Referring to findings from recent Alpha Trader Forum debates, I can see how some of my buy-side peers would potentially perceive high touch desks operating as some type of “light ECN” creating mega block opportunities as part of their liquidity sourcing activities. The high touch desk would need advice on how to optimally execute such block trades under the current regulatory regime where BCNs are no longer permitted.
The evolution of high touch in fixed income is different to equities and more challenging as in the past the sell side high touch trader was a hybrid role between PM and trading desk coverage. Post MiFID II, I saw counterparties started to focus more on the flow than the PM coverage and that was a mistake. If the counterparty does not have PM coverage, it will impair their opportunities to receive the flow as PM coverage is feeding the idea generation that is the basis for every order. We have spent a lot of time explaining to our counterparties that the PM coverage must be maintained with a high level of service. Some counterparties have therefore leveraged the same type of setup as within equities, with some sales traders providing a service to the trading desk and separate sales trader for PMs. It’s important that the coverage evolves within the sell side with more people dedicated to trading topics and at the same time have a sales team working closely with the PMs We need to repair these unintended consequences of MiFID II. The technology innovation is continuing within fixed income may result in the buy side interacting more through algorithms with our counterparties. There is a challenge with the inducement and unbundling regime within MiFID II as the pricing model of fixed income research is unlikely to generate enough return for the sell side. It is less expensive compared to equities which is the likely reason why the sell side concentrate their efforts on flows where they can generate revenue to the detriment of the coverage. While the pricing model for fixed income research may be flawed, as with many, I agree it is not as valuable compared to equities. We still need to figure out how to resolve the lack of high standards within PM coverage.
The market practice around primary issuance of bonds are still suffering from opaqueness and manual trading. Are you seeing any highlights toward improvements?
We are reviewing and developing our internal process for primary issuance of bonds where we use Ipreo as the backbone for workflow. This enables us to create a faster sequential workflow and order creation for our PMs. Afterwards the trading desk can use Ipreo as a central hub to collect all the market information and details for the issuance including the coverage of the issuance on the day. We are now working on connecting Ipreo to attain full STP with our SimCorp platform as the allocation is still manual in Ipreo. We have already come half-way in front to back STP automation after investing a lot in reducing manual processes between the PM and trading desk systems which has also improved our compliance processes with a unified audit trail. I can already foresee the need to build a system for projects like this where we need multi-platform aggregation capabilities for primary issuance. Initiatives like project Mars, which was driven out of data ownership concerns, creates confusion among the buy side and we see additional primary issuance solutions looming which calls out the need of aggregation. Since IHS Markit took over Ipreo, we have seen a spike in client onboarding and it is working well for us. We are aware of yet another impending solution which cannot be named due to confidentiality reasons, which could be promising with its already established reach to market participants.
Have you identified any changes to how the buy-side traders use and various brokers perform with their equity trading algorithms post MiFID II? To what extent do you think these changes are due to technology innovation or enhanced leverage of the new market structure? (Is the algo interaction with electronic liquidity providers increasing in importance?)
We see that many sell-side firms are challenged to stay ahead with the phase of technology innovations and cost is the main challenge. There are significant developments within the sell side SOR and introduction of low latency connectivity to respond to the increased market fragmentation, use of periodic auctions and access to ELP SI liquidity.
We need a granular review and should tailor our approach to access mid cap, large cap, low and high touch with multiple decision trees to support these processes. We cannot use the same parameters in our SOR for all markets and tailoring the approach is a big challenge as sometimes we would ideally need more data to validate our decisions. Therefore, we need to work closely with the sell side as consultants who need to assist us with adjusting the parameters specific to our firm’s requirements.
Mid cap liquidity access is particularly key in Europe which represent a major part of our flow but is sensitive to market impact. We need the smart order router to route the flow to the right venues to avoid signalling and toxicity issues.
We leverage TCA and venue analysis to identify which of our sell-side counterparties are staying abreast of the technology race delivering the best performance. We hope that European brokers can also keep up in this costly technology race as we know the US banks have the capability of investing more. We do need strong European counterparties as challengers within the brokers list to prevent an oligopoly which would be undesirable for the entire market. These European banks need to make investments in trading technology to sustain the momentum.
With plenty of news around the new equities venue and crossing network services, which innovations do you think stand out as beneficial to the buy-side trading community?
Post MiFID II, I have found that “tradeable IoIs” are very useful new alternative tools to access the market. It is interesting to have the option of accessing the balance sheet of the bank. Workflow works very well. Similar to our buy-side peers our objective is to reduce our footprint of execution on the market and our key challenge is to understand where we can find liquidity before having to access the LIT market. Periodic auctions have delivered incremental short-term liquidity and the reversion results look promising. We have reduced our volume participation in the LIT market. In the past we traded in the range of 10 -20% of the volume but now, we are in line and closer with the US market and have reduced our participation to take into consideration the market structure evolution. We are closer to 5 - 10% of volume in Europe. Our goal is to find liquidity through other MTFs with dark liquidity, blotter scraping, periodic auctions and specific flows through SIs before trading on the LIT market.
As we still experience evolving trends among the buy-side how they use bond trading platforms, how do you feel the race is progressing between dominant legacy and challenger brands? Has competitive pressure resulted in overall innovation and how do you foresee the competitive landscape to look like in 3 years’ time?
My simple view is that increased competition and alternatives are useful. Platforms like “BondCliq”, a consolidated quote platform for the corporate bond market are useful as they create a competitive environment. The result could be a more efficient trading market centralised and organised. This is what we are looking for to improve the pre-trade price discovery and deployed automation. Another platform is “Opendoor Trading”, which intends to offer all-to-all anonymous trading with zero information leakage. I think that anonymous trading is one solution to improve the fixed income market structure and to centralise the market. In Europe we saw a lot of new entrants a few years ago but now there is mainly MarketAxess, Bloomberg, Tradeweb and Liquidnet which is growing but is different as it is focused on buy-side to buy-side trading. Electronification in fixed income is growing and there will likely be more new interesting participants. Some people define it as “equitification” but I do not agree with that definition as it is still completely different. What was developed for equities is not something you can gold copy into the bond market. The market structures are not comparable with only about 40,000 equities ISINs compared to over a million bond ISINs.
Data is crucial and we are still challenged with trying to identify sources for fixed income data and the quality of it. Our traders need better data to produce better pre-trade intelligence for our PMs and to decide on the right trading strategy to optimise the trading process. The buy side have a major challenge finding the right tools to operate in a complex fragmentated market with a lack of liquidity.
The value of the alpha trader in the fixed income investment process is relatively similar or more important compared to Small/Mid cap within equity trading. Another issue is how we can review the performance of the execution in bonds. While it is common to trade using the RFQ protocol, it is not always the best way to find liquidity due to the hidden cost of information leakage on the market. Therefore, we need to create a smart logic to divide our workflow between liquid, non-liquid, high touch, low touch, time sensitive and non-time-sensitive. Better data will help us with both our automation needs and improved pre-trade market intelligence for more complex markets.
Another interested trend is that the sell side are appointing one person in charge of eTrading across asset classes. In the future I foresee that we may receive a price stream, like within FX today, from our various counterparties. Such price streams could be aggregated to create an order book and smart order routing could deliver automation and optimise the execution process. Only time will tell if the existing platforms will aggregate such price streams efficiently. Trades below €1 – 2 million investment grade could be automated by a sort of order book created by a directly executable price stream.
Do you see portfolio trading of bonds with electronic market makers as a viable option? If ‘yes’ – how do you see this interaction evolving?
We have met a lot of sell side to evaluate this new process since the beginning of the year. We are very interested about this process as it can be suitable for specific liquidity flows. The increase of passive management, with the ETF ecosystem, and a technology driven approach has enabled this new type of bond trading with additional opportunities to access liquidity to a low cost. The sell side are happy to access this liquidity for hedging and matching some ETF workflow. The remaining challenge is around the workflow as it still does not operate through full STP like you trade on platforms. We have built a specific workflow to send RFQs, collecting and storing the information and to evaluate the pricing from our counterparties. We need the platforms to reshape the portfolio trading as the sell side’s Microsoft Excel templates are not really something we can work with. While we know that electronic platforms are developing it, there are none in production yet. We also need to inquire what extent portfolio trading is suitable for our trading needs compared to other protocols. The PMs are interested in the portfolio trading process for their portfolio adjustments, inflows and outflows and transitions between portfolios. Our job is still to identify the optimal execution process to fulfil best execution requirements and to overcome the challenge of lacking historical data to validate if portfolio trading will be suitable for each portfolio type.
Automation and data will reshape credit trading over the coming 5 years and it will be very interesting for buy side head traders to stay in the forefront, updating our systems and analytic tools with these developments.
We hear from the buy side that market colour and pre-trade intelligence are two hot areas of interest. How do you see these areas evolving within your multi-asset responsibilities?
Our trading desk is a ‘solutions and services’ desk. The solutions could for example be pre-trade advisory for execution, smart content, market colour and bespoke analysis of holdings within specific teams. The buy-side trader’s capabilities are increasingly going to overlap with the sell side as we attain better technology inhouse. The buy side are now empowered to consume the value delivered by multiple technology providers, customising and producing smart content. Something that was exclusively reserved for the sell side in the past.
Which areas do you wish the European including British regulators would focus on resolving going forwards to improve the market for the buy-side and their end investors?
The primary major issue is that we need consolidated tape for both equities and fixed income, like in the USA, to deliver better analysis to support best execution and to attain a realistic and holistic view of where the liquidity is. To strengthen the European capital market, the regulators need to prioritise the establishment of a holistic view.
The second priority would be to improve the transparency of the bond market calibrating the definitions of ‘liquid’ and ‘illiquid’ ISINs as this categorisation is wrong. More bonds should be flagged as liquid to support pre-trade transparency, price discovery and automation.
A third challenge is the impending decision on Brexit and how we can continue to trade after a prospective British exit from the EU.
We already spent a lot of time in the first quarter of 2019 to be ready for a prospective ‘hard Brexit’ by the end of March. Since then, we continue to consult with our legal team to keep up with any changes but it is difficult to predict the final outcome. We have already migrated all UK counterparties and MTF platforms so we have continuity trading Euro cash assets. There are still OTC challenges remaining.
We are following the agenda closely to be ready for the end of October. Ultimately it is a very time-consuming process and we expect the outcome may become even more challenging as we may need to finalise a solution in parallel, with all the other priorities we have.