Ralston Roberts, CEO of Instinet explains the firm’s enduring success over 50 years and plans for its future growth.
What has been the impact of Covid-19?
No one would have predicted the “Black Swan” that is Covid-19. We take this pandemic incredibly seriously and have had to establish enhanced operational policies and strategies to protect our employees and manage the risks it poses to our clients and our business. Our hearts go out to the people who have been suffering, and have lost loved ones and friends to this disease.
From a marketplace perspective, it has obviously had a dramatic effect. The volatility is challenging for our clients, and causes dramatic spikes in message traffic and order activity, which has caused some participants to experience technology outages and slowness. Scale, redundancy and capacity are greatly challenged in such markets – and we all must maintain rigour and an ‘all hands-on deck’ approach – but in a much more virtual way – to ensure reliability and operational efficiency.
When we look back on this period, we will have learned a lot about the value of dispersed, seamless technology and digital working environments, and the importance of the protection of our most valuable asset – our people. Moments like this serve to remind us all of what matters most.
Since the financial crisis, there has been a raft of a regulations on both sides of the Atlantic. Which rules do you think have had the most impact in changing the industry? What have been the opportunities and challenges?
In Europe, it’s hard to over-estimate the impact of changing regulations over the last twelve years. MiFID and MiFID II not only radically changed how research and broker execution is procured and analysed, they also completely reshaped how liquidity flows, and shifted regulated accountability for “best execution” from the broker side to the investment manager side. So, the entire trading life cycle has changed: idea formation, trade routing decisions, counterparty interactions, trading costs, and execution analysis have all been impacted.
In the Americas, similar regulatory themes have been in play but they have been implemented slightly differently. The US Securities Exchange Commission’s “Concept Release,” the sweeping Dodd Frank reforms, circuit breakers, and the various Reg ATS-N and CAT changes have likewise looked at virtually every corner of the trading life cycle. As with MiFID/MiFID II, the high-level goals revolve around transparency, fair access, and mitigating systemic risks.
The opportunities inherent in these changes have heightened the focus on and appreciation of execution quality, which is a good thing for the end investor. They have increased the use of electronic trading strategies and platforms, which in turn have increased efficiency and lowered trading costs.
The challenges are that idea formation and the way that fundamental investment ideas are generated have changed. This has impacted how the buyside delivers investment performance to their end clients, as well as how the sellside adds value and are evaluated by their asset manager clients. Finding available liquidity has also been an increasing challenge, which has only compounded the ongoing difficulty of uncovering alpha.
We’ve seen changes to how securities are traded over the course of the day, as well, with enormous volumes concentrating at the close. That has changed the way strategies work and has exacerbated the search for quality liquidity.
What reverberations has MiFID II or any other European regulations had in the US?
The biggest investment management firms are global. It’s difficult to operate with disparate processes and relationships for global firms, so most of the largest asset managers have adopted MiFID II-compliant policies and approaches on a global basis. So, we’ve seen similar pressures on research unbundling, commission rate compression, order routing transparency, and an increase in the use of data-driven execution analysis to better understand and demonstrate best execution.
The environment has become more challenging for agency brokers with analysts noting that latencies are getting shorter, data is more ubiquitous, and markets have become more electronic. How do you see the model evolving to meet all these challenges?
What we think we’re seeing with regard to the agency broker space, is that global scale is critical, and that the client execution-centric model has become highly attractive to larger firms looking to maintain meaningful, data-driven performance that will earn them a significant rotation with the biggest buyside firms. The recent market structure changes, along with broker consolidations and acquisitions, suggest that agency execution is not only the way that regulation is headed but is also increasingly demanded from clients.
In pre-crisis periods, trading relationships were cemented by multiple touch points across “origination” and distribution – including financing and capital provision, access to issuers, and research. But the rules around risk and capital reserves have changed how risk is provided. The issuer calendar has radically changed, and as we’ve said – the procurement and perceived value of research has been altered.
Today, trading relationships are evolving an increasing focus on explicit execution quality – which is the wheelhouse of an agency broker. We will see more use of automation, more demand for efficient liquidity aggregation, a higher consumption of execution quality consulting and highly personalised customisations of workflow solutions that drive efficiencies and lower costs across the trading life cycle.
Despite technology being key, what changes have organisations had to make to their culture and structures? What skillsets are required today?
Everyone has had to become more fluent in “data”. It was always the lifeblood of the trading markets, but now the explosion of a wide variety of sources of data, our ability to process it, and in the ways to use machine learning, deep learning, and AI mean that all participants must be able to integrate quantitative processes throughout their workflows. Most firms are becoming more “fintech”.
That means skillsets in quantitative analytics and advanced coding are massively important for securities professionals today and tomorrow. But we should not forget that we are all financial professionals first – we’re fintech and not simply “tech” for a reason. As great as AI can be, it is not inherently creative. Human ingenuity and industry will still be the source of ideas. Machines do not form loyal relationships based on intuition or nuanced understanding of a clients’ preferences. So, finding that balance between technology fluency, quant skills, market insights and client service will be the key to success.
From an Instinet perspective, the firm was one of the first disrupters over 50 years ago, but how can the company ensure it will be here in another 50 years? How do you stay ahead of the competition?
That’s exactly the question that keeps me on my toes, and rightly enough. No one would care what we did fifty years ago if we didn’t continue to be relevant. Fortunately, we have.
Instinet has worked very hard over the decades to foster and support a culture that values unconventional problem-solving and a willingness to challenge the status quo. And we’ve always sought to embrace – rather than resist – emerging technology. But in my opinion, the real thing that keeps Instinet at the forefront of change is our deep and abiding connection to our clients. We don’t run around being innovators for innovation’s sake. That would be the classic “solution in search of a problem” – and who has time for that? We create new things because we are trying to solve real problems that face our clients now or that we know will face them in the future. Our people are encouraged to ask “what if we did x rather than y”, “what would happen if we automated a or b?” or “what can we do to improve this or that?”
That way we’re not chasing the competition, we’re sprinting toward new ways to enhance our clients’ performance across every part of the trading life cycle.
What changes have you made since you took over the helm?
I’ve brought in a new Chief Technology Officer and we’ve restructured our IT organisation across more Agile development philosophies. We’ve embraced the Cloud. We’ve invested in our quantitative teams and have grown our electronic execution business. We launched Foreign Exchange trading via our Newport FX offering. Last fall, we launched our successful BlockCross offering in EMEA, and earlier this quarter we went live with Paxos settlement service, utilising blockchain technology.
How do you plan to develop BlockCross in Europe?
As a well-known liquidity aggregator in Europe, the team looked to build on our current presence by providing clients with the ability to seek conditional block liquidity in an anonymous way. The launch of BlockCross for European securities has enabled us to leverage our existing client relationships and strong integration with buy side trading platforms to deliver incremental, outsized crossing opportunities for clients across the globe.
This first phase of our rollout was about enabling clients to seek block liquidity in European or US securities, using Conditional order types and/or blotter integration. The model allows clients to look for outsized liquidity opportunities, while minimising risks of information leakage. Our next expansion of the BlockCross offering will be for Canadian securities, pending regulatory approvals. And we continue to expand our capabilities in conditional order management overall. This is all part of our ongoing commitment to providing astute liquidity aggregation to our clients around the globe.
What are your plans for blockchain given the recent news that you and Credit Suisse were the first two to firms to go live on Paxos?
Blockchain is obviously a fascinating technological innovation that promises to increase efficiency and deliver long-term cost benefits. We were very pleased to add this Paxos launch among Instinet’s long list of “firsts”. This is a significant digital transformation to a part of the trading life cycle that doesn’t always get enough attention – yet has a significant impact on the net cost of trading.
We will continue to work together with Credit Suisse and Paxos to further build out and refine this new solution. The next phase of growth in that space will happen as more and more firms connect.
Looking ahead over the next year or so, in general where do you see the greatest opportunities and challenges aside from Covid-19?
We’re excited about what greater use of the cloud can do for our scale, processing power and advanced quantitative capabilities. Block-sized liquidity will continue to be highly prized by our clients, so we will continue to expand our offering in liquidity aggregation and novel crossing opportunities. Execution quality analysis and our rapidly expanding consultative offerings will be an exciting space to watch. We’re continuing to expand our footprint for providing automation that is highly personalised at the client level, that applies our multi-colocation and machine learning technology.
There is also a lot of activity happening in the outsourced technology space. A “software as a service” platform has grown dramatically in a highly “organic” way, and is going to continue to be a priority in the next twelve months.
There are other macro and micro trends in play in our industry, such as the soft trend of “active to passive” and the continuing implications of regulatory changes, but none that have been as sobering as this threat to human health and safety.
Biography: Ralston Roberts was named the global CEO of Instinet in 2018. Previously, he was with Goldman Sachs, where he served since 2015, most recently as co-head of Execution Services and co-head of Electronic Trading for EMEA. Prior to Goldman, he was Chief Operations Officer of SunGard’s brokerage business, and as Senior Vice President of Product Management. Before SunGard, Roberts was Chief Technology Officer at Wells Fargo Securities. He holds a BA in Business Economics and Geography from the University of California at Santa Barbara.