FIX messages which helped to provide pre-trade price estimates and greater post-trade transparency on fills.

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1 n THE TRADE 100 Peace in our time A s The TRADE was preparing for launch, Richard Semark was about to make a leap of his own. After 17 years working for the buy-side, first at AXA Investment Managers and then UBS Asset Management, Semark crossed to the sell-side to become managing director responsible for UK-to-UK sales trading at UBS Investment Bank in June As unbundling rose up the agenda, it was becoming clear that trading had to stand on its own two feet. For many brokers, trading had previously only needed to be good enough to capture commission paid for research and advisory services, says Semark, now head of European client trading and execution, UBS and CEO, UBS MTF. By 2004, use of FIX had already made giant strides in facilitating electronic communication of trade information between the buy- and the sell-side. Voice and file-based communication was being augmented by exchange of 108 FIX messages which helped to provide pre-trade price estimates and greater post-trade transparency on fills. As the potential of electronic trading became more evident, sell-side product development and service offerings to clients took different paths. Major brokers either tended to focus on delivering trading tools such algorithms or concentrate their efforts on the provision of execution management systems (EMSs) to enrich the trading environment and the level of control which clients experienced when self-directing their order flow. At the time, the ability to commit capital and unwind positions to facilitate client trades was still allimportant, so the skills and reputation of the sales trader were significant factors in winning execution business. But it was already clear that the emergence of commissionsharing agreements (CSAs) offered an opportunity to gain market share through the development of n the trade 100 and the future of trading n special 10th anniversary edition A new era of understanding is breaking out between brokers and clients, and between humans and computers. Chris Hall n

2 electronic trading capabilities, so long as those responsible for sales trading were prepared to buy in. At least some of the appeal of electronic trading came through the opportunity for anonymity and control: the search for liquidity by sales traders could result in significant market impact, but algorithms could mask intentions by drip-feeding an order into the market more carefully. Seeing your lunch eaten by an algorithm could cause internal tension between high- and low-touch execution teams. The solution? If you make trading and execution staff collectively responsible for the entire P&L, but ensure flow segregation, the client is under no pressure to fill individual buckets, says Semark. In your own hands If relations between sales traders and nascent electronic trading franchises were fractious, the risk transfer requirements of buy-side traders when trading blocks also made for an occasionally bumpy ride, in part due to asymmetric information on trading costs. The tools made available to buy-side traders, particularly the algorithms that allowed orders to be sliced smaller to avoid market impact, both redressed this imbalance and gradually made capital commitment a requirement for fewer deals (crisis-induced constraints on bank balance sheets 91 Richard Semark head of European client trading and execution, UBS and CEO, UBS MTF If you make trading and execution staff collectively responsible for the entire P&L, but ensure flow segregation, the client is under no pressure to fill individual buckets. subsequently reduced this activity further). Over time, the buy-side took on more of the risk and responsibility. MiFID s introduction in 2007 saw a ramping up of electronic trading appetite on the buyside as more firms invested n the trade 100 and the future of trading n special 10th anniversary edition n 109

3 n THE TRADE 100 As in every day life, technology is teaching the customer to expect more. 100 Tim Wildenberg CEO Neonet Securities 110 n the trade 100 and the future of trading n special 10th anniversary edition n

4 in EMSs to help demonstrate their ability to meet the directive s best execution requirements to end-clients. Putting more data in the hands of clients enabled a more sophisticated understanding of execution decisions. Transaction cost analysis (TCA) went from hard copy to real time but only relatively recently have firms have been able to analyse trades at a child order level. Though not perfect, this tick-by-tick, micro-second by microsecond information is providing unprecedented levels of transparency. As in every day life, technology is teaching the customer to expect more: show me your order routing methodology; prove to me you re capturing the spreads. We can crunch so much more data today. Cost control and transparency are key themes, and the lessons learned and services developed in equities will be ported to other asset classes, says Tim Wildenberg, CEO of Neonet Securities. Every touch point As the process for executing trades has become more structured and data driven, so has the process for measuring the performance of brokers. US asset managers were the first to put more structure around the evaluation of services from brokers, but these were done using in-house developed processes, often administered by the trading desk, but not necessarily taking trader s views into account, or at least often underweight compared with PMs. Over time, the evolution of more standardised ranking tools helped to support a level of transparency that encourages competition and continuous improvement, but the exercise still varies according to the trading desk s level of independence. The current intensity of many asset management firms focus on execution performance is reflected in the changing nature of broker review meetings. Annual or semi-annual meetings that often took a somewhat anecdotal view of performance have been replaced by more frequent and more data-driven exchanges. We are presented with 30-slide decks which provide us with detailed statistical analysis of our performance at every touch point across execution and research, says 90 Mike Seigne co-head of electronic trading, Europe Goldman Sachs There is increasing focus on improving transparency across a wider range of instruments and trading strategies. Ashok Krishnan, head of execution services, Europe at Bank of America Merrill Lynch. The data is now available to give us more clarity, and clients understand that we value it. n the trade 100 and the future of trading n special 10th anniversary edition n 111

5 We have seen rich, complex relationships develop between many different types of financial institutions. 54 David Escoffier CEO Newedge The growing complexity of market structure and variety of execution options has led to more diverse questions, but Semark suggests the availability of data is changing the nature of the discourse itself. Instead of asking brokers to prove they re managing conflicts of interest and delivering high quality execution, clients are asking for the data from which they will draw their own conclusions, he says. Feedback loop Electronic trading levels have reached a plateau in the last four to five years, despite the growing availability of real-time TCA and the ability to factor more sources of data into trading decisions. There are good reasons to think this is a temporary pause, but it also underlines the continuing importance of the human element of trading. This has implications both for the services delivered and the coverage framework within which they are provided. For Mike Seigne, cohead of electronic trading, Europe, at Goldman Sachs, the shift is from differentiation by product to differentiation by service. Now, the challenge continues to be on delivering optimal tools for trading, with increased focus on where and how liquidity is being sourced, he says. While some clients require a lot of fine tuning controls and 112 n the trade 100 and the future of trading n special 10th anniversary edition n

6 n THE TRADE 100 customisations, others more interested in the simplification of the user interface. In general there is demand for a more intense level of live trading service. This has led to greater investments in tools to help focus attention on outliers, trades with potential opportunities or challenges in real time. Also, there is increasing focus on improving transparency across a wider range of instruments and trading strategies, which presents a different kind of challenge, for example when an instrument is traded over the counter. Portfolio managers, traders and brokers are using the new insights provided by technology not to reinvent the investment process but to refine it. More detailed information on what happens to a stock after a trade is leading to a more valuable feedback loop between portfolio managers and traders. Brokers are looking to knit back together order flow after years of Chinese walls between sales and electronic trading, but are using technology both to maintain anonymity where requested and to provide more cost-effective means of sourcing liquidity across multiple channels. Similarly, brokers are using technology to support a more quantitative approach to the provision of trade facilitation. In a world where liquidity can never be taken for granted especially as the greatest alpha often lurks in the more obscure assets risk transfer between brokers and institutional investors is unlikely to recede entirely. And when technology is eroding imbalances in information flows, relationships between the main actors are becoming less adversarial. David Escoffier, CEO of Newedge and deputy head of global markets at Société Générale Corporate and Investment Banking, confirms that the past decade has witnessed a maturing process from the traditional client/provider relationship to one in which financial institutions are partners who appreciate that they play different roles sometimes competing, sometimes cooperating at different times and in different markets. In an environment where all financial institutions are being heavily affected by regulation, rather than predominantly n the trade 100 and the future of trading n special 10th anniversary edition n 113

7 70 Ashok Krishnan global head of execution services Bank of America Merrill Lynch The data is now available to give us more clarity, and clients understand that we value it. the sell-side, we have seen rich, complex relationships develop between many different types of financial institutions, from insurance to asset managers to hedge funds to pension funds, he says. Signs of maturity What does this mean for coverage models? Post-crisis, trading desks have reduced headcount and doubled up on skills, leading to a shift in their requirements, but preferences still vary depending on the make-up of the client s flow. A desk that trading cash equities globally, across the three execution channels, plus listed derivatives and delta one products, might appear to be an ideal candidate for a single point of contact. But many such firms really value the expertise that a variety of specialists can bring, often because a small team does not necessarily have the knowledge to trade seamlessly in areas with which they re less familiar. The needs of institutional trading desks also develop over the product cycle, as clients become familiar with services that mature over time. Electronic trading services were initially offered to the buy-side as an alternative to sales trading, offering greater anonymity than traditional capabilities. Over time, a number of buy-side clients decided that there were benefits in sales traders seeing their electronic flow for certain orders, and today many clients are happy to be serviced by the same trader for both their high- and low touch trading requirements. The number of firms that want separation between electronic and sales trading is getting smaller and smaller. The focus is more on the liquidity than the channel. Brokers have to be flexible enough to respond as client needs evolve, says Krishnan. Semark believes conversations between the buy- and the sell-side will become even more quantitative and data driven over the next five years. Just like fixed income traders are asked to find the bond issue that meets specific criteria, equity traders will increasingly be asked to establish a particular exposure using the full range of instruments and tools at their disposal. Escoffier suggests the sell-side coverage model of the future must offer a flexible service across both multiple asset classes and various execution channels, but with a common underlying infrastructure. To achieve the required economies of scale, this model must be based on standardisation and electronification, he says. n 114 n the trade 100 and the future of trading n special 10th anniversary edition n