Natan Tiefenbrun, Managing Director, European Execution Services at Bank of America Merrill Lynch discusses the tools needed to succeed in the changing execution landscape.
Natan Tiefenbrun is head of Equities Execution Services for Bank of America Merrill Lynch (BofAML) in EMEA. He joined the firm in 2013 and is based in London. Prior to joining BofAML, Tiefenbrun spent four years with the London Stock Exchange Group, most recently as the Chief Executive Officer of Turquoise, a pan-European equities and equity derivative trading platform. Prior to this position, he spent two years working with a VC-funded start-up. He began his financial markets career in 1993 at Instinet, where he spent thirteen years developing and running the firm’s portfolio trading, algorithmic trading and sponsored access businesses. He holds a degree in Computing Science from the University of Edinburgh.
What difference has unbundling made to the buy & sellside relationship?
Unbundling has empowered buyside heads of trading to select brokers purely with a view to achieving “best execution”. We’ve seen this result in a trend towards buysides holding fewer (deeper) sellside trading relationships. They are focused on those able to deliver the best outcomes and deepest/most diverse liquidity.
Having to define best execution has created its own challenges; how to balance quantitative and qualitative factors; when to choose high-touch versus low-touch execution; whether to in-source or out-source responsibility for measuring execution quality; how to recognise and measure good service; how to construct robust performance and liquidity benchmarks. This is driving the need for new quantitative skills and expertise on the buyside, along with a growing appetite for data and actionable insights.
On the sellside, execution must stand on its own merits; some firms have quit the execution business entirely, while others are investing to benefit from consolidation towards the most capable players. At BofAML, areas of investment have included access to and provision of additional liquidity, enhanced cross-asset trading solutions, new infrastructure for algorithmic trading designed to perform in the new landscape, and investments in our sales trading and trading teams. We’ve also further enhanced our capabilities to evaluate different liquidity sources and trading tactics, understanding both child- and parent-level impact and performance implications and using these to optimise outcomes. These tools, data-sets, and on-going dialogue enable us to evidence to clients that best execution is being pursued and delivered.
What type of services do the buyside want today – algos, TCA, analytics?
What all clients have in common is the need to focus on driving continued improvement in execution outcomes for their investors. Clients are progressively more aware of their own flow characteristics and the evolving market structure, and more sophisticated in using this understanding to inform execution decisions. We see analytics, and services that help provide and evidence structured data-driven decisions, in particular demand.
This drives us to increase customisation and specialisation of our services to suit each individual client’s needs – whether in the behaviour of algorithms or routers, in the service from a sales trader or sector trader, in the provision of liquidity, or in the execution consulting and TCA reporting. This is resource-intensive, but rewarding, as it deepens the partnership with clients and can demonstrably enhance outcomes. But we shouldn’t over-complicate things – in plenty of situations, and especially in emerging markets and for larger orders – clients want the same today as they did ten years ago – service and insight from experienced sales traders and traders, and access to the liquidity they need.
More specifically, there has been an increased reliance on data and analytics, but how is that enhancing the decision-making process? Everyone wants more data and analytics in order to evidence best execution – but most clients would admit it can be challenging to collect sufficient, good quality data to draw statistically robust conclusions. To help, we established a dedicated execution consulting team that partners with clients – sharing expertise, comparing or supplementing data, and advising on how to optimise execution further.
In algorithmic trading, some clients focus principally on measuring execution results against an agreed set of benchmarks, and give brokers discretion on how and where to execute – subject to rigorous post-trade analysis and discussion. Other clients look to standardise how and where brokers execute on their behalf – due to their own conviction and/or to make comparisons across brokers easier. Once clients have meaningful analytics, they can improve the quality of the engagement with brokers, and drive a cycle of experimentation and improvement to their algorithmic trading.
We’re also seeing more clients integrate execution-related analytics into their investment processes, for example, using a better appreciation of addressable liquidity and market impact estimation to inform order-sizing, or using stock factor exposures in combination with trading cost estimates to weigh up alternative hedge construction or trade expression.
If there’s one particular area where clients are still grappling with the ‘whether or how’ to apply data and analytics, I would point to high-touch execution.
How has the trading landscape changed with the advent of new counterparties and trading protocols? Help or hindrance?
Innovation often introduces complexity – but it also creates opportunities for meaningful differentiation in areas that might have looked commoditised previously. Eventually, after a transition period, the market collectively drives the success of innovations that solve a real problem, whether by reducing costs, improving efficiency, or simplifying the search for liquidity.
If the sellside challenge is dealing with the added complexity, the challenge for the buyside is the lack of data with which to judge or measure the benefit/detriment. Quite reasonably, many clients are sceptical about change until its value is proven – but proving whether a new venue or protocol adds value is particularly complicated if you experience it indirectly via brokers.
BofAML has supported trading initiatives such as Turquoise Plato and Cboe LIS – what are the importance of these relationships?
Both have brought significant efficiency improvements and cost reductions in block trading, safely bringing together buyside parent-orders and sellside algorithmic liquidity. They’ve driven the expansion of large in scale liquidity, and have also driven lower fees from prior incumbents – to the benefit of end investors.
Plato Partnership provides a unique forum in which the buyside and sellside can work collectively to drive further innovations. It can be challenging to reach consensus, but everyone benefits from the quality of debate.
Where specifically does BofAML see opportunity to innovate and differentiate in execution?
We want to be the best, so of course we have to find opportunities everywhere. In high-touch execution, we believe the market remains rather opaque. We don’t think the buyside receive the information they need to fully grasp how sellside firms decide who to show liquidity to, or how they manage and recycle their risk inventory. And nor do clients know how their business contributes to the overall success of the broker’s franchise. We’re working with clients to change that.
In algorithmic and portfolio trading we’ve totally re-engineered our trading platforms to deliver significant improvements in our capabilities, and in our ability to improve execution performance for clients. We’re also excited about our new office and dramatically expanded footprint in Paris – relationships matter, and clients are welcoming the greater presence and engagement.
Looking ahead, what challenges and opportunities do you foresee?
I think our industry, buyside and sellside, will continue to see revenue and cost pressures. Working together, we have to find ways to become more efficient, without sacrificing the integrity or quality of the execution outcomes we deliver to investors. Partnerships with fin-techs, investments in technology/people, and improvements in statistical research methods can all contribute to enhancing the quality and efficiency of decision-making. And as clients increasingly focus on multi-asset strategies, demand will grow for more integrated and consistent cross-asset execution services.
One other small detail…, we still need to work across the industry to introduce a consolidated tape with consistent data standards and reasonable economics. In many respects Europe remains a much more expensive region to invest and execute, and market data costs would be a prime example of this.
©Best Execution 2019