A NEW LOOK.
Kristian West – global head of equity trading at JP Morgan Asset Management explains why his division has changed its modus operandi.
What have been the changes you implemented since taking over the global role in 2013?
Historically the firm did not operate on a global model but each region was in charge of running its own operations. However, last year we decided to break down the silos and launch a three year roadmap to ensure that best practice is adopted globally. My role was created in order to co-ordinate and facilitate this change for trading. Some of the challenges are not technology but a change of mind set of people who are used to working in a different way.
How has it worked in practice?
We have done a number of things such as creating a global co-ordination team which leaves little opportunity for any information gaps. For example, if we meet with our Asian technology teams, we ensure that the US and European teams are part of the conversation. We are also in the process of standardising our service level agreements and analytical frameworks across the different regions. Before, decision-making went to different hierarchies, but now there is much more harmonisation across the equity franchise. We still have regional centres of excellence and chief operating officers but now there is a more global frame of mind.
What were the drivers behind JP Morgan Asset Management (JPMAM) building its own order management system?
There are several reasons why we did this, the first being that because of our size, we did not want to be reliant on a single vendor to build our controls and manage compliance modules as well as broker restriction obligations. In the past, the OMS has been a fairly rudimental application but we are now expecting the application to do more and so we wanted the opportunity to create our own intellectual property. The OMS is now live for convertible securities, derivatives and equities. It also ties back to our globalisation push and the need to have consistent OMS and execution management systems whilst taking into account regional nuances.
What are some of those differences?
In Asia there is much less self direct trading than in Europe. Equally there is less in Europe than in the US due to the number of different markets. The automated platforms also operate differently in Europe – they are more dependent on external algorithmic tools with the engine deciding which strategies and parameters are the most effective. In the US we have our own core algo platform that then uses the smart order routers of the brokers.
How do you think your relationship with the sellside has changed?
I think one of the biggest changes has been our ability to analyse execution quality. Every six months we conduct a broker review and within each category, whether it be programme trading, single stock trading, or algos we have a score and can rank the relationship. For example, on algos we can apply our own internal metrics consistently and assess performance across our brokers. This enables us to have informed conversations on how a broker can optimise their execution services to better serve JPMAM and its clients. It has led to a more consultative process and more tailored products.
In general the relationship discussions have become more performance based. One reason is that the commission sharing agreements have given the trading team more autonomy as to whom and where to trade. The trading team must be able to measure the performance of those decisions.
What impact do you see regulation having?
If you look at MiFID I, the biggest change has been fragmentation and the ability to trade off primary venues and on broker crossing networks (BCNs) and dark pools. This can offer greater flexibility to institutional investors because you don’t always want to trade on an exchange with pre-trade transparency. You want optionality. However, MiFID II’s desire to reduce this flexibility may impede institutional investors. Additionally reducing deferred trade publication times may have a material impact on risk management and liquidity of securities, especially SMEs.
Do you think there will be an end to dark trading?
There will be caps – a 4% cap on the amount of trading in a stock that can be carried out on a single dark pool as well as an 8% cap on the amount of trading in a stock that can be traded across all dark pools, so dark trading will be impacted. However, the rule does not impact all pre-trade transparency waivers. We, along with other institutions, are talking to the European Securities and Markets Authority (ESMA) about using large-in-scale waivers for the larger orders which are not subject to a cap. This may encourage more institutional crossing opportunities.
Do you think best execution has improved since MiFID I?
The fragmentation created by MiFID has forced firms to scrutinise best execution in greater detail. Today, there is a lot more technology and resources to measure performance and question whether a trading strategy was the right one. I think firms also use such analysis to differentiate themselves from their competitors.
Looking ahead, how do you plan to continue to develop the business?
Two things we are looking at are greater global consistency around our execution processes and the analytical framework because these two pieces can add significant value. It is not so much about the automated process but the creation of an implementation strategy specifically for the client that can be put into an execution framework and then measured.
We are also using the technology to better measure the overall implementation processes. We have a considerable amount of data that we can analyse to change behaviour and help improve the overall implementation of investment strategies. This helps us reduce frictional costs to the fund and makes it more relevant to the end client.Kristian West, managing director, is global head of equity trading at JPMorgan Asset Management. An employee since 2008, he was previously head of trading strategy. Prior to that, he was head of equity execution services at Barclays Capitaland worked at Goldman Sachs, responsible for trading within their electronic transaction services(ETS) department. Before that, he was a US sales trader at Spear Leeds & Kellogg, and worked at Ford Motor Company’s research and development centre. West has a BSc (Hons) in Management & Design in Engineering at London City University, School of Engineering and an MBA from the Universityof Cambridge.
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