UBS has already carved a name for itself in the execution stakes, but now that MiFID has finally arrived, the bank is more than ready to meet all challenges. Before going off on sabbatical Nick Holtby, former head of European client trading and execution, and Richard Semark, chief operating officer for UBS client trading and execution within European equities explain the impact the post MiFID world order has had on their business.
For the past year, MiFID has been dominating the head- lines, but the trading landscape has been changing for some time. What would you say have been some of the major changes over the past few years?
Nick Holtby – The introduction of MiFID has accelerated the trends that were already taking place in the marketplace. In the past two years, the buyside has taken more ownership of the execution process and the cost, and this had led to an improved segmentation of the order flows. Fund managers already had choice and could send their orders to an exchange, trade with multiple brokers using their capital, or use an alternative trading platform. Under MiFID, execution has gained a much higher profile and we expect this to lead to an increase in fragmentation of liquidity pools as well as demand for more specialised trading tools and products.
What we have seen at UBS is a different split between what we call low tech, which are orders sent through direct market access (DMA) or algorithmic trading, and high tech, the more difficult, illiquid stocks that require an individual to add value. In the old fashioned world of stockbroking, our flow was divided between about 80% high tech and only 20% was low tech. Today that ratio is about 40/60.
What changes have UBS made as a result of MiFID?
Nick Holtby – We have been investing heavily in automation since 2003, developing our capacity and scalability as well as our DMA, algorithmic and portfolio trading tools. We see execution as a whole package and the different components as being complementary rather than competitive. The most important thing is to give clients the broadest possible range of execution services. This means they can send their orders via algorithms, DMA or we can cross their flow internally on our network. UBS has the largest market share for equities execution globally and on a good day, we see crossing rates of between 15% to 20%.
In the run-up to MiFID, we focused our efforts on building our smart order routing (SOR) technology which connects to the different liquidity pools and these are expected to increase under MiFID. Although other sellside firms are doing the same thing, it is the quality of the SORs as well as the trading tools that will differentiate the firms. We have leveraged our experience from the US, where fragmented markets have been the norm for many years. Our SORs, for example, search for opportunities within the UBS internal liquidity pools before looking simultaneously at the other trading venues, including dark pools.
What is the role today of your sales/trader?
Richard Semark – In the past a client would call in an order and then the sales/trader would go away for about ten minutes and source the best price. Today, our sales/trader is in the same position of knowledge but he does not have to move from his desk. The information is all in front of him through our Fusion system, which not only gives him real time visibility of market flow and UBS positions but also, when necessary, a clients’ current and historic activity. It is a much more efficient way of doing business.
How difficult is it to trade in the current choppy markets?
Richard Semark – One of the greatest challenges recently has been the significant rise in volumes due to the volatile markets we have been experiencing. As a result, it is crucial to not only have the technology but the scaleability, capital commitment and risk management structures in place to handle this increase. It is also important to have algorithms that enable clients to benefit from the different pools of liquidity. Last year, at UBS, we introduced a new algorithm called TAP, which enable clients to balance the amount of trading they are doing with the amount of information they are giving out to the market.
The way TAP works is that clients can grade how urgent their order is on a scale of one to five. At level one, the order will passively access dark pools only while at level five it will aggressively take liquidity without constraint. The levels in between allow clients to adjust their participation in public markets according to the level of urgency. Typical factors determining the final execution venue include the size of displayed liquidity, the probability of detecting hidden liquidity, the cost of sending outsized orders, the effect of the order being routed out to other destinations, the life of the existing quote, and the possibility of price improvement.
Looking ahead, the next generation of algos will become even more sophisticated and tailored to a particular client’s requirements.
How important will transaction cost analysis become in the post-MiFID world?
Nick Holtby – One of the main changes under MiFID is that buyside firms have to not only make more complex decisions about execution but they also have to justify them to their firms as well as their end clients. As a result, I think we will see an increase in the use of quantitative analysis tools which will help buyside traders improve the way they segment their orders.
Quantitative analysis provides insights into liquidity, volatility, momentum and spread – as well as the potential market impact and market risk inherent in trading a particular series of orders. In the past year, we have added to our head count and have hired a significant number of Masters and PhD graduates to explain the different options and strategies available.
What is the strategy behind joining Project Turquoise and taking a stake in Chi-X?
Richard Semark – The big issues in the post-MiFID world, are where to trade, finding the right balance between market impact and risk, and source liquidity but also minimising information leakage. Our goal is to connect to as many viable liquidity pools as possible. With Turquoise we have an interest as one of the owners and also have a minority stake in Chi-X.
However, not all pools are created equally and the market impact can differ from one to the other. As a result, we assess each trad- ing venue individually to ensure it is consistent with the best ex-ecution requirements under MiFID. We will evaluate every opportunity because as a shareholder we can influence how these platforms are developing. We are pro-competition and platform neutral as for us, the end game is to improve the market structure and reduce the costs which should improve liquidity.
Obviously, UBS is not the only bank developing its post MiFID offering. How do you keep your competitive edge going forward?
Nick Holtby – We are all in a technology arms race and in today’s complex world, the barriers to entry are high. The quantity and quality of your liquidity pools is crucial as is your ability to innovate. Investments in risk management processes will also be key especially if markets continue to be volatile. UBS is in a pre-eminent position as being a leader in all three execution channels and we think this position is sustainable. (The bank has won awards as top broker for direct market access and algorithmic trading). It is not just about your technology, though, but being totally client focused and tailoring products to meet their specific needs.[Biographies] Richard Semark joined UBS london in June 2004 as a managing director responsible for UK sales trading. He previously worked at AXA Investment Managers and UBS Asset Management for 15 years, where he was a key member of the UBS unbundling team responsible both for strategy formulation and marketing to clients. In 2007, Semark became chief operating officer for UBS client trading and execution within European equities with responsibility for execution client relationships, strategy and marketing. Nick Holtby, who is currently on sabbatical, joined UBS in 2004 as head of European client trading and Execution responsible for cash trading, sales trading, portfolio trading and direct execution services. Holtby was also a member of UBS’ cash management and investment banking boards as well as chairman, wholesale markets group, London Stock Exchange. Previously, Holtby worked for O’Connor Securities, an options market maker, where he started his career in 1989. ©BEST EXECUTION