Sharpening the edge.
Richard Semark, managing director and head of European client trading and execution and CEO UBS MTF explains why experience matters.
What have been some of the major changes since you took over the helm at UBS MTF?
We have continued to grow and the last four months of 2013 were the best ever. This has continued into this year. We transact around $1bn of business on most days and are typically around 1% to 1.5% of total European equity volume. We have added clearinghouse EMCF, which is now being merged with EuroCCP, and we remain pro-competition and choice when it comes to clearing, trading and market data. We also added Spanish equities to the platform and that has proven successful. It took the country a longer time to open up to alternative markets, mainly due to its post-trade process, but changes to local rules have meant that many of the challenges have been solved.
On the technology side, we are moving our infrastructure, matching engines and gateways to Slough because of the co-location benefits with other venues. We believe this will make us more attractive and further increase our membership.
What do you think of the current trend of brokers integrating their execution desk between low and high touch and execution consulting services?
Our main priority is to find liquidity for our clients and we took the strategic decision to keep our sales/trading expertise across single stock, portfolio and algo trading. Many firms have replaced their senior members with junior staff but our sales trading team consists of experienced traders who know how find liquidity. We have preserved the separation of algo trading as our clients’ value genuine anonymity. Our algo sales traders have access to our broad range of tools, have insight into the market structure as well as trading trends.
We have though made several changes using technology to improve the efficiency of the trading desk so that it can cope with high volumes without increasing the number of staff. We have a much more quant approach to capital provision with programme trading and single stock as part of the solution in the search for liquidity.
Equities had a rocky start to the year. How do you see the rest of 2014 going?
Equities did fall off in the beginning of the year but there is not a great level of concern. Part of the decline was due to the US tapering of its QE (quantitative easing) programme, the slowdown in China and the impact this was having on emerging market currencies. We have though seen a shift to Europe. I think corporate earnings will be one key determinant in the future direction of the market. However, in general, single stock selection is the consistent theme this year whether it is quantitative or fundamental. The high beta sector trades we saw in the past are much harder to pull out of the market.
What do you think the impact of MiFID II will have, especially on dark trading?
At the heart there seems to be a view that dark trading is bad and lit trading is good. Regulators also seem to believe that price formation can only happen in the lit market, but both MTFs and broker crossing networks (BCNs) print immediately and the post-trade is just as important as the pre-trade in price formation. Market participants also give weight to a number of other factors such as historic price and volume that also contribute to their decision process. We have found that institutional clients value the ability to trade in the dark because of the protection offered against information leakage. I also do not think that all orders placed in the dark would automatically switch to lit venues when the cap is imposed. Some would just disappear leading to a loss of liquidity and an increase in cost and market impact on all orders.
What do you think MiFID II left out?
I am massively frustrated that the lack of a consolidated tape was not addressed. I know there is vested interest in maintaining the status quo and it was inevitable that MTFs would have to start charging for data at more realistic, lower levels. I hope to see a consolidated tape at some stage because of the benefits and consistency that it brings. From a regulator’s point of view, it offers the ability to recreate a market whereas now there is no agreement on what constitutes a market in terms of for example, venues, volumes and time stamp.
Market participants are also concerned about the FTT. What impact do you think it will have?
One of the main misunderstandings is that the cost will be borne by the end user. If the aim is to impact the banks, then taxing transactions will not hit the target. Another concern is that individual countries seem to have different interpretations which means we could end up with different flavours of the FTT. This creates logistical difficulties for the whole market.
What are your views on the Financial Conduct Authority’s review of the way asset managers pay for research?
I think it will accelerate the unbundling of commissions and could lead to further consolidation of trading counterparties. This is because in today’s environment, firms need to significantly invest in technology and high quality people in order to build pools of liquidity and have broad distribution. Buyside firms may have anywhere between 20 to 200 counterparties to deal with but they typically only have single digit providers for portfolio and single stock trading. Many firms are trading counterparties only to pay for advisory input. The global firms who have the resources will be the beneficiaries, although there will always be room for the niche firms. I think it will be hard though for mid-tier brokers.
What are your future plans?
Our strategy is to continue to focus on our technology and market expertise. We have seen our market share rise and we want to build upon that. The volume of regulation is a challenge in itself but clients are becoming more sophisticated, more questioning and looking to use a wider product range. We want to ensure that we are providing good solutions in areas that are evolving as well as for our traditional equity franchise and clearly articulate our process. We are here to find liquidity for our clients and be transparent about how we do that.
© BestExecution 2014