One of the key themes of our recent debates has been the increasing sophistication and electrification of markets as market structure and regulation drive change across multiple asset classes. This month, the Buy-side Perspectives caught up with Daniel Chambers, head of trading at Sequoia Capital Fund Management, to share some observations on the changing execution landscape, the kinds of tools available for the buy-side and the changing relationship between the buy-side and the sell-side. 

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1.    Can you tell us a little bit about your role? (introduce yourself)

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Daniel Chambers, Head of Trading, Sequoia Capital Fund Management

Sequoia Capital Fund Management (SCFM) is an alternative investment management company specialising in investing via quantitative strategies and returned 13% in 2015 net of fees. Our focus is on short-term trading opportunities in highly liquid derivatives and FX spots and forwards using our proprietary models. 

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2.       There's a lot of talk about technology these days, but fixed income and FX have historically been less electronic than equities. What sort of electronic tools do you find useful in FI and FX?

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At SCFM, we do not trade Fixed Income, but trade G10 FX entirely electronically. The decision to execute entirely through electronic trading was a natural one to make as it is in keeping with SCFM’s ethos of implementing technology to increase productivity. SCFM has always traded electronically, with varying degrees of complexity. Reduced likelihood of errors during execution and increased efficiency were two of the key drivers for this decision and has proved to be the correct decision. The post-trade TCA and liquidity analysis are carried out using tools built in-house.

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3.       Are there any limitations to these kind of tools? How do you choose between them? (for example, algos, TCA)

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Using in-house tools provides flexibility that enables you to look at things from different perspectives and make changes in the way you view your costs etc. Third-party software that I’ve seen does add value and include numerous features that may not be available immediately when building tools from scratch in-house, but my opinion would still be that gaining insight to then replicate and create a more bespoke version, is a good approach to take.

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4.       Some people say the relationship between the buy-side and the sell-side is changing. Do you think that's true? (e.g. broker lists getting shorter, less support for the buy-side)

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There appears to be an ever increasing list of available ‘liquidity pools/providers’. A good relationship that is mutually beneficial between buy-side and sell-side is extremely important. This is something we work hard to maintain at SCFM, with regular dialogue between ourselves and each of our LPs each month. This consistent communication provides insight and assists in reducing market impact and preventing undesirable flow. There is an obligation from both sides to ensure the market conditions are constructive for the participants in that market.

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5.       What are your thoughts on the increasing amount of regulation faced by the buy-side? (e.g MiFID II)

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The buy-side should be looking now at improving the tools it is using to ensure it is ahead of the curve with regards to market regulation and accountability. The near future is likely to include further attempts to regulate market activity, with a spotlight on FX. Accusations of rigged markets, various scandals and numerous lawsuits have pushed clients to allocate resources to monitor the realisation of best execution. Monitoring and evidencing best execution becomes more crucial as the markets become more highly regulated.

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6.       Are there any changes you'd like to see in the industry? (e.g. industry collaboration, reducing the cost of data)

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Greater communication between buy-side peers would be a step in the right direction. Events such as those held by K&K Global Consulting are extremely useful and productive, providing a platform for those in the industry to voice their concerns and any issues about which they feel concerned. This type of communication creates a market place that is forward thinking and functioning in a manner that is most advantageous for all participants.