Richard Worrell is the Head of EMEA Equity Trading for Janus Henderson Investors, the Chairman of the Investment Association’s Buyside Trading Committee and a Plato Partnership board member.
Having helped drive the recent Investment Association (IA) and Association for Financial Markets in Europe (AFME) proposal for shorter European market hours, we thought it was an appropriate time to sit down with Richard and gather his thoughts on this and other key topics.
Can you explain the thinking behind the market hours proposal?
There are three main pillars to the proposal; market structure, mental health and diversity & inclusion.
My dealing career started, in London, on US markets, with 9.30am-4pm Wall Street hours, so market structure has always been front of mind. I always felt that the later opening time combined with a good gap between corporate earnings (usually around 7am), and macro updates (usually 8.30), led the US to be better prepared when markets opened.
Then, many years later, when I joined Janus Henderson Investors, I was struck by a Transaction Cost Analysis (TCA) report that showed our Implementation Shortfall costs in the first hour to be double that of any other time period. Equally it always feels a rush to be ready for the market open here and generally opening auctions were simply not of a size worth participating in. Anecdotally, a number of buyside peers also said they left orders for 30-60minutes to let the market settle.
Additionally, there is the mental health aspect of the trading environment. The industry is working very long hours and this is not just the case for traders. It might be the analyst who is in at 6am to assess a Swiss corporate earnings release, the support team which is in before 7am or the ECM desk that stays in the office until 10pm allocating a deal. Analysis by employment law firm Fox & Partners of Health and Safety Executive figures has shown that the number of working days per worker lost because of stress in financial services is 31% higher than the average between 2007 and 2010. While market hours are only part of this, it feels like a great place to start.
Similarly, when it comes to diversity & inclusion, we hope it will help attract younger talent and continue the cultural shifts that we are starting to see. I see this as one small step forwards and support from those involved with IA and AFME demonstrate that this is a popular opinion.
What else is the IA Buyside Trading Committee focused on?
The first thing to do is congratulate the previous Chair, Adam Conn, and Deputy, Gregg Dalley, for doing a fantastic job.
Over the last month or so, I have spent time individually meeting with as many committee members as possible to understand how the IA can help them and their firms. Crucially, when it comes to my role, it is worth noting that while I have the glamourous title of Chairman, my role is really coordinator, and it is mostly about harnessing the committee’s enthusiasm to drive real change in the industry.
The regulatory side will always keep us occupied, whether that be, for example, the impact of Central Securities Depositories Regulation (CSDR) or the Share Trading Obligation (STO). Equally we are keen to focus on the bigger picture and look to future technological developments, so that will be a priority too.
You are a board member on the Plato Partnership. What have they been working for?
The Plato Partnership is a not-for-profit company of asset managers and brokers who are collaborating to bring creative solutions and efficiencies to today’s complex equity market place. Over the last year alone, we’ve done two things of particular note. Firstly, in June, we announced a collaboration with BMLL Technologies called Platometrics to provide twelve daily T+1 market quality metrics to enable more transparency and information across the European trading landscape. The hope is that this helps us all to assess consolidated volumes across Europe and measure addressable and non-addressable liquidity. Secondly, we’ve just announced a partnership with Babelfish Analytics, a next-generation TCA platform.
In what way is Babelfish differentiated?
I’m very excited by this. It definitely feels like the next generation of TCA. We all know how the various algorithmic strategies that we use work but do we really know what goes on “under the hood”? For example, do we know how and why Broker A route in a block seeking algo versus Broker B? Babelfish will look into that sequencing analysis. TCA generally only looks at executions but the real challenge is understanding the orders that don’t fill. Babelfish looks at factors such as internalisation and the opportunity cost of that, which feels very topical given the rapidly changing market structure in Europe.
How has the year been for Janus Henderson Investors?
It has been another year of change. Mergers are always a challenge but we are in good shape from a global trading perspective. We are all on one order management system (OMS) and execution management system (EMS) and our processes and procedures have been reviewed and updated.
You should notice a theme of collaboration and teamwork throughout this discussion and that is key when working for a global asset manager with three main dealing desks. The individual and collective thought process has been crucial, and we have been working globally on matters such as improving our Best Execution process and materials as well as creating a new qualitative and quantitative broker review process.
Now we’re onto an OMS upgrade, EMS upgrade and have just changed TCA provider. The only constant is change!
How about the desk in London specifically?
I joined nearly three years ago and have loved (almost) every minute. The daily interaction with active managers who want to engage and adding some value to their process remains the most rewarding part of the job.
One tangible result this year has been a significant year-on-year increase in algorithm usage, which has reduced our explicit costs but, more importantly, an even more significant reduction in our implicit costs.
A less tangible result has been a more proactive, forward-thinking team. Empowering all of the team and helping them develop and thrive continues to be very enjoyable. Their diversity of thought and collective mindset is fantastic and I’m proud of the progress we’ve made together.
The regulatory and administrative side can be an obstacle but reducing risk and improving processes is a constant evolution. One of the changes we implemented was to bring a compliance team member onto the desk.
You mentioned the regulators earlier. How do you see regulation changing?
It’s hard to know but if you want change, you really have to help drive it, so I try to be proactive in every part of my job.
I was struck by a comment that I heard from Tilman Lűder at an event a few years ago, where, he said (and I’m paraphrasing slightly) “I never hear from the buyside about what it is you want”. Part of the reason I decided to take on external roles was to try to bridge this perceived divide to the regulators. It is one thing going to a conference and listening to the regulator but it is another to actively engage with them.
On that front, I was delighted to go to Brussels with a number of peers recently for a workshop on the Consolidated Tape. That was an exciting first step and I hope we continue to pursue this hard as an industry.
Of course, there is still lots to work on, whether it be the Share Trading Obligation, the value of Periodic auctions or preserving mid-point to name a few.
Do we need a Consolidated Tape and is it achievable?
We certainly do but a Consolidated Tape is a huge undertaking. I was however extremely encouraged by the recent ESMA MiFID II/MiFIR Review Report which discussed this in more detail and propose we pursue it.
We believe a Consolidated Tape is much needed. The simple fact is most of the buyside do not know what the true addressable volume is in a stock on a given day. So, from a Best Execution point of view, you aren’t able to judge the true performance.
At a higher level, I’d like to think a Consolidated Tape would help capital markets formation, such as by helping portfolio construction. If we are looking to initiate in a position, we will use Bloomberg primary as our reference to assess liquidity. However, that is not a full analysis of the volume. If we look at the Composite EU, we often see volumes that are 30-50% above the primary but we don’t truly know how addressable that is so we can’t use it. Ultimately, in one example this year, that stopped us from investing in a stock that is up over 60% year to date, and that is a significant opportunity lost.
There is an argument that cleaning the data would improve much of this but a full Consolidated Tape should be the end goal. The PlatoMetrics platform I mentioned earlier is a great start but it needs to be mandated by the regulators.
Where do you stand on periodic auctions and Mid point?
First of all, we should always encourage innovation and periodic auctions are one example of that. I am convinced if we put more innovation at exchange level we would trade more there. Just look at the likes of Turquoise Plato Block Discovery and CBOE LIS, they are having record volumes.
The main reason I’m in favour of periodic auctions is that they reduce our frictional costs. While ESMA’s consultation process gives everyone a chance to have a view, we now seem to be in a slightly ridiculous situation where a buyer or seller may not be able to cross at mid-point because it is ‘sub tick’.
On their website, ESMA states it is “enhancing the protection of investors” and the FCA state “We aim to make markets work well”. I question whether we are doing that by removing mid-point. In my opinion, it is very simple – if there is a buyer and seller, the mid-price is the right level. It saves both sides costs, in reality our savings and pensions, and that should be what we are all trying to do.
What about the cost of Market Data?
I was encouraged by the ESMA report that they are looking at this. I do feel the cost of market data warrants a regulatory investigation here as well as in the US. My attention was first really drawn to this by the Copenhagen Economics report. One of the statistics within there was “Since the mid-2000’s, market data fees have increased in the range of 30-60%, net of inflation. I’m no expert but I’d say that warrants analysis.
At the same time, we should keep things simple. The ESMA report notes that, “in order to fully understand the market data policy, users have to go through an average of 120 pages of documents per trading venue”. This seems like overkill. IEX’s Brad Katsuyama also makes a valid point “The market data they sell is not generated so much as regenerated from the trading activity of their own members”.
If Brexit finally happens on January 31st, what is next for the Share Trading Obligation?
This is a slightly farcical situation in my opinion. The reality is we are all trading on regulated venues and markets as well as other regulated counterparts so should it matter where the trader or portfolio manager is based?
We could end up with a situation where a global asset manager with fund managers in both Europe and the UK has to split an order in the same stock and trade on different venues and likely at different prices. If this happens, we are letting our clients down and that is not acceptable. I honestly feel our Best Execution should trump the STO. The regulators have made conciliatory remarks and changes but we are not in the right place yet.
Any closing thoughts?
Hopefully my desire to see us all working better together has come through.
The main reason I wanted to do this was to emphasise the good work that three of the teams I am part of are doing, whether it be internally at Janus Henderson Investors or externally with the IA and Plato Partnership. I also wanted to say thank you to Anita and Kristian Karppi and the team at the Buy-side Trading Community for being part of our Market Hours proposal and just generally leading the industry on Diversity and Inclusion.
We like to see our relationships with our brokers as partnerships too. Whether it is day-to-day content, enhancing the liquidity offering or the continual testing of algorithmic strategies, I still believe people can make the difference in an increasingly electronic world.