Profile | Paul Squires
What impact do you think MiFID II will have? I do not expect it to materially change our commercial proposition. We would have to change our algos if for example they got rid of the reference point waiver or minimum resting period but it will not have an impact on whether there is a need for a buyside trader. I would like to see a consolidated tape come out of MiFID II but I think the focus has shifted from seeking the perfect ‘tool’ to more general enhancements to post-trade reporting standards and granularity. Overall, I think that the Financial Transaction
Tax(es) will have a more significant impact on the industry. The Italian and French versions have not caused too much of a concern in terms of deteriorating liquidity and spreads. However, the initial European draft will be significantly more damaging if it goes ahead in its current form. In short it could encourage global market arbitrage and it would ultimately affect the real economy which is probably why there are already counter- proposals to water it down.
What about EMIR (European Market Infrastructure Regulation)? This is where our focus has been recently. We are setting up front to back end processes and structures to meet the new requirements. As part of that due diligence, we have drawn up a shortlist of clearing members we would like to work with.
How has the relationship with the sellside changed since the financial crisis? In the past there was a greater reliance on the sellside to provide the intelligence, tools, analytics and systems. The buyside trader would pick up the phone to the sellside sales trader and have a conversation about the orders and form of execution. This has changed and what we have seen over the past few years is the empowerment of the buyside trader. One reason has been the rationalisation on the sellside because of falling commissions and shrinking margins. This has been unsettling for us and the industry because, among other things, people form professional relationships with people they work with so closely and this can
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add value to the execution process. However, the buyside can’t really complain because to some extent we drove the model by wanting those lower commissions and more algorithmic trading.
What has been the result? We are more in charge of the decision making process (around execution) but this has come at a cost in that you need to have the right tools and capabilities to do it yourself. We conduct rigorous due diligence and trade with around 100 different brokers although we have significantly consolidated our list over the past three to four years. A big percentage of our flow goes through our top 20 or so brokers with a large tail being handled by local specialists used for specific mandates such as small caps or emerging markets. We rate brokers on a variety of criteria with transaction cost analysis accounting for a 35% weighting followed by the quality of execution intelligence, IOIs (indications of interest) and general service. I actually don’t see too much difference
between the top global brokers because they provide almost everything we want. The level of service is not the same though as in the pre- Lehman days where there were maybe 30 sales traders covering different markets and sectors. Their headcount has been cut at the same time that their client base has grown. This means they do not have time to be as proactive, scrutinise markets and stocks or call us with any breaking news in a particular stock for example if an order has been executed.
Do you think that unbundling is finally happening? Yes, I think we are actually beginning to see the dawn of a new era. The Financial Conduct Authority has reinforced to fund managers the need to avoid conflicts of interest and to split the commission components more than they did in the past. Having the execution decision segregated from where advisory services are being consumed is liberating and positive from a clients’ perspective: it is their money and it is important to ask whether you are using their commission spend
Best Execution | Summer 2013
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