GETTING IN TOUCH WITH THE CLIENT.
Sam Baig (right), Head of Electronic Trading at Citi and board member of Plato, and James Baugh (left), Head of EMEA Market Structure at Citi and board member of Turquoise, explains how the industry and Citi are responding to the ongoing regulatory changes.
What impact will MiFID have on trading?
James Baugh: There has been a lot of focus on non-equity asset classes and the impact on the equity landscape has at times been overlooked, but there will be a fundamental change. The share trading obligation means that trading has to take place on a regulated market, MTF, Systematic Internaliser or a third country venue deemed equivalent. One of the main questions for us is not only how you provide liquidity, but how can we differentiate ourselves from our peers and optimise principal flow and central risk inventory.
Will there be a shift to block trading and do you see the emergence of many new platforms?
James Baugh: One of the unintended consequences of MiFID I was the fragmentation and atomisation of trade sizes in dark venues. For example, today we may have to slice a parent order five or six times to find liquidity. Next year this will change with the implementation of the dark pool caps (4% of the total amount of a stock being traded on an individual platform and 8% across the EU) and I think we will see a re-aggregation of liquidity which should be seen as a positive and will definitely increase electronic block trading. We are also seeing the buy and sellside come together to develop solutions and drive change. This was not always the case in the past but now we see them both joining initiatives such as Turquoise Plato™, which we see as a good development for the industry.
Sam Baig: One of the challenges will be in how to manage different block trading initiatives, which to date number around five to six. I think there are only so many block trading venues that the market can absorb and once you get beyond two to three it may be difficult. Venues will have to create their own solutions and be innovative if they want to keep their edge.
There has been a lot written about unbundling. How do you foresee the market changing?
Sam Baig: I think it will be better for the brokers because, in the past, clients might have chosen the brokers they were most comfortable with, but now they have to be more analytical and discerning as well as have a greater understanding of benchmark performance. Brokers for their part will have to become more detailed about how they can improve their performance and rankings. Also, the algos will have to be recalibrated as liquidity profiles change and we potentially see a move from dark pools to lit venues.
Can you provide more detail about equity electronic trading at Citi?
Sam Baig: A few years ago, Citi may not have been the first name in European electronic trading but we have invested heavily in our equity execution platforms to provide electronic access across all channels in order to capture market share. We have also been hiring in the quantitative space as we see the industry is moving towards more quantitative performance metrics. Previously, this may have been part of another job, and if a broker was not ranked highly there would have been a conversation to better understand what the client required. Today, it is much more detailed and it is important to have global quantitative analysts, forming part of our global execution advisory services group, who can gather and measure data across electronic trading – both high and low touch
James Baugh: It will be increasingly important for sales traders to be aware of the changing market dynamics and how to also access block liquidity through the electronic channels.
What technology, including artificial intelligence, is being used to meet the different challenges presented by market conditions and regulation?
Sam Baig: One of the areas that we have spent a lot of time working on globally over the past two and half years is artificial intelligence and machine learning. For example, last year we launched a new product called OPTiMUS which takes into account a number factors, such as volatility and market conditions, before determining in real time which is the optimal algo to use for that particular order and trading strategy. It then provides the post trade performance metrics about how it performed. The focus is on the characteristics and the completion curves so that we can find the optimal way to execute an order in real time, which is what will be required under MiFID II.
The next iteration will be looking at the best route to take during intra-day trading and not just at the start of the trade. This requires though a huge amount of data and processing in order to change direction if you think the market conditions are changing during the life of the order.
Looking beyond 2018, what challenges as well as opportunities do you foresee?
James Baugh: MiFID II will present opportunities for firms like Citi as evidenced by the investment we and others are and will continue to make into our electronic execution platforms. I think going forward, one of the themes may be that of consolidation, with smaller firms partnering with larger institutions like Citi for execution and custody. Those like Citi who have balance sheet and are able to provide a comprehensive service should be well positioned to succeed in the new post MiFID II environment.
James Baugh is European Head of Market Structure for Citi’s equity business, responsible for developing its liquidity strategy. Previously, he spent more than 11 years at London Stock Exchange, where as head of equity sales he was directly responsible for initiatives like Turquoise Plato Block Discovery™. Other roles included Head of Client management for Baikal, the dark book initiative initially developed in partnership with Lehman Brothers and was made Director of Client Management at Turquoise when LSE acquired the business in 2010. A graduate of Newcastle University, Baugh began his career as a commodity analyst before spending the next six years at Dow Jones in a variety of roles including the management of their European Power Index business.
Sam Baig, Head of Electronic Trading, joined Citi in 2014 from Goldman Sachs’ spin out Redi. He previously worked at Goldman Sachs as head of European electronic connectivity. In his current role, he is responsible for driving efficiency, consistency and optimisation across the company’s cash execution channels, inclusive of programs, electronic, and high touch. He joined the bank as head of liquidity strategy having previously run the European operations of Redi. Sam spent seven years at Goldman Sachs and five years at Morgan Stanley prior to that. He started his career as a commodities analyst specialising in precious metal prices.