TAKING THE BUYSIDE BULL BY THE HORNS.
Mike Bellaro*, global head of equity trading, explains why Deutsche Asset Management has taken a proactive role in building out its electronic and block trade offering.
What impact do you think MiFID II and unbundling will have on the industry?
I think it will usher in a new era and will be the equivalent to the Big Bang in 1986. It will reshape the equity landscape especially on the execution front. At the moment, there has been a lot of focus on unbundling and research in terms of the product, how it will be valued and the pricing, but there has been little thought about the profound changes this will have on the execution side. I expect this to become a greater focus for the buyside trader because it will no longer be combined with research in a bundled commission payment and they will be more accountable.
What about the sellside?
It will be a complicated exercise. The larger firms will have hard choices because they will no longer be able to benefit from cross subsidisation and will have to decide which segments of the business they want to stay in. It will also be challenging for the smaller to medium sized regional firms, and we have already seen some withdraw and disengage from pockets of execution. However, there will also be new kids on the block and overall those that continue investing in R&D as well as innovation in electronic trading will be able to continue to operate in this space.
We have taken a fairly aggressive view and have cut our electronic trading partners from 17 to six core brokers. We mainly did this from a governance standpoint because it is impossible to understand what 17 brokers are doing with your order flow and how their dark pools operate.
How do you envision the buyside trading desk of the future?
It is all about scalability and using technology to sharpen your competitive advantage. Our aim is to build a sellside infrastructure within the buyside. We have been investing significantly in technology to build a platform that uses smart order routing to optimise efficiency, minimise slippage and preserve alpha for our end investors. However, it’s not just about the technology but also hiring traders from the sellside who understand the investment process.
I read that you place great emphasis on automation and that the majority of your order flow was executed electronically – much of it through customised algos with no human intervention. What are the reasons behind this?
I have a good problem in that volume has exploded on the platform – we have four times the volume that we had three years ago. However, one of the challenges is to support the growth without taking on additional headcount. The only way to do this is through automation. We want to automate as much and as intelligently as we can. What this means is that the majority of flow can be traded electronically while the alpha-sensitive trades can be directed to the hands of the most capable traders.
It is not just execution but we are also automating the broker selection process. We are adopting a multi-faceted approach and look at historical best execution, real-time data, and block trading as well as other relevant data driven criteria. Based on the data, the trader will be given the three best brokers to choose from. Also, automation can help inform the trader which algorithmic strategy would work best given the type of order. This would be based on analysis of previous best results. However the final decision would still rest with a human, at least for the more important trades.
You have said in the past that block trading has become increasingly important. What are the drivers?
There are definitely the winds of change, and over the past three years we have put a strong emphasis on building a block-trading desk. This is mission critical because although most buyside firms are strong in electronic trading, block-trading seems to be a lost art. One reason is that over the past 15 years the common practice is to take large orders and break them down into tiny pieces to avoid leakages and minimise impact using dark pools and broker-dealer algos. However, this is set to change under MiFID II and the caps on dark pools. This will change the psychology of the buyside trader and we believe we will see a return to block trading.
When looking at post-trade analytics, I have seen a significant improvement in performance which has all been led by our block trading. Our electronic trading performance is upward now on one to five basis points, and block trading accounts for the entire alpha preservation.
Touching on the role of the sales trader in more detail, how have things changed and what is their value-add today?
In my mind, in order to have a trading desk that is best in class, you need sales traders that are embedded in the investment process. This not only involves handling the more complicated trades but also idea generation, market intelligence and offering advice on portfolio construction and implementation. In other words, it is a partnership whereby they deliver information that the traders care about and is aligned with the fund managers’ objectives.
I know you are one of the founding members of Plato but can you tell me about the initiative and in general what role you think utilities play?
Plato Partnership Limited, is a not for profit industry group representing the buy- and sellside and has come together with a vision of improving market structure in Europe. In the first of many future initiatives, Plato has partnered with Turquoise (see). We will work together to deliver increased efficiencies to anonymous European equity block trading. I think it is a unique value proposition in that it creates a safe and secure environment for market participants to trade large natural blocks anonymously, without market impact and leakage. It is all about reducing the cost, which ultimately improves the experience for our end clients.
One of Plato Partnership’s other unique features is that the revenue generated will be directed to academic research via the Market Innovator (MI3), which will produce independent research and analytics to improve future market structure and design.
Overall, we have the brightest minds in the world of equity trading sitting around the table trying to develop solutions for the complex issues that impact equity trading today. The potential solutions this delivers will benefit the entire market place enormously.
Looking ahead, how do you see the equity landscape developing?
As we head into MiFID II, I think the equity world will become more capital intensive than it is today. One of the biggest challenges will be how firms can interact with a centralised risk book and conduct block trading without human intervention. As for the opportunities, on the automation front, I expect continued innovation in electronic trading and for example, some of the solutions that we now see in FX to be used in the world of equities.
Biography: Mike Bellaro is global head of equity trading for Deutsche Asset Management (DeAM). He joined DeAM in 1988 with seven years of industry experience. Prior to his current role, he was head of equity, derivative and passive & active FX trading for DeAM in Frankfurt. Previously, he managed the US equity and derivative trading operations for DeAM in New York. Prior to this Bellaro served as a managing director in the equity trading department at Scudder Kemper Investments (acquired by Deutsche Bank), where he was heading international trading at the firm. Bellaro started his career as an international arbitrage trader at Paine Webber, working both in New York and London. He is a Member of the Advisory Board for TradeTech DACH, TradeTech FX and International TraderForum.