MOVING GOAL POSTS.
David Miller, head of EMEA equity trading, Invesco explains how the buyside is changing the rules of the game.
How is the trading function structured at Invesco and what is your role within that?
Over the past few years we have centralised trading into three geographical regions, the US, EMEA and the Far East. Traditionally trading desks were more or less in the same place as the Fund Managers, regardless of where in the world the stock was traded. We now have traders operating in relevant time zones taking full advantage of local knowledge, and importantly, operating in real time.
The EMEA Equity team consists of seven traders divided between Henley-on-Thames and London, representing the various locations the European businesses of Invesco have always occupied. There are still a large number of Fund Managers based in Henley and they value face-to- face contact with the traders.
The tactical advice the traders are able to give is increasingly seen as an important part of the investment decision process.
There has been a lot written about the changing relationship between the buy and sellside. How do you feel it has altered? Is the buyside taking more control over the order flow?
Without doubt the buyside trader has become more empowered as the job has evolved. Those we see today are very different from those we might have seen ten years ago. Traders have far more tools available to them to enable them to interact with the market directly, and far greater attention is now paid to measuring the execution performance and value that we add. There is increasing regulatory and customer demand on us to demonstrate and quantify how the trading process is contributing to the overall investment proposition.
Notable is the proliferation of trader focus groups where ideas and market developments are aired, and in some cases put into practice. It is no surprise that some new trading venues are born of these groups as we become more involved in market structure and strive to find ever more suitable venues to transact business.
We have taken more control of the day-to-day flow, however the relationship with the sellside remains very important.
There had been an assumption that the Institutional trader would work all his trades via algos, leading to a significant retrenchment by the brokers. However, in reality the skills of the traditional stockbroker are still very much in demand, especially at the smaller end of the market. It takes a specialist to place or source stocks that have fallen out of favour with other investors. Not to mention capital provision, an important, if sometimes costly function and very useful aid to liquidity.
I read that you feel algos have become more commoditised. Why do you think that?
We could have well over a dozen different algo suites sitting on the desk that on the face of it are fairly similar. They all trawl through both dark pools and lit markets seeking out liquidity on our behalf, with perfectly crafted trading functions in the desire to minimise market impact. The trick is to identify a particular USP, or to bracket the strategies to more usable levels of aggression.
There has been a large amount of investment in the equity space but, the interesting thing will be how this technology moves to other asset classes.
What impact do you think MiFID II will have on the industry especially the caps on dark trading?
If larger trades are included in the dark pool trading caps, due to the large scale reference waivers, the ability of institutions like us to transact larger orders should not be restricted. I understand the desire to push a substantial amount of flow to lit markets. Creating transparent price formation is important, particularly for retail flow. However, there are some orders that are not suitable and are simply too big to work through an order book. They need to be broken up or be allowed to rest in a dark pool, in many cases to maintain an orderly market.
We may well see the resurgence of the specialist broker who can source liquidity away from the more traditional venues once again.
The important thing is to permit different execution methods, to enable the trader to get the best result for the client in as reasonable and fair way as possible
The buyside is far more engaged in MiFID II than it was in MiFID I. I’m not convinced that the industry on the whole was really fully ready in 2007. Now however we have much more internal engagement and are an integral part of the decision-making process.
Do you think that best execution has improved since MiFID I?
If you were to ask me what keeps me awake at night, it is how do we define, prove and demonstrate best execution. It is hard to define and is open to multiple interpretations. I do think the absolute prices achieved today are better than in the past but there is still work to be done on the pre-trade side. This is the art and skill of the trader, as opposed to the science and technology of a post trade analysis.
Traders have their own process of determining the best tactic to get the best result, the challenge is to somehow make that measurable and incorporate that into a framework to demonstrate what we have done to achieve the best and most suitable outcome.
I think it is one of my industry’s biggest challenges and we are spending a great deal of time with our compliance department and regulators to develop the right kind of framework.
MiFID I set us on the road while MiFID II will keep us very much engaged.
What do you think of the buyside platforms such as Plato and Luminex? Will they help in mitigating liquidity risks? Will it stop HFT from gaming?
New trading platforms need a large number of participants and institutional flow to make them work. Liquidity is always the defining factor in the success of a venue and with the right mix of participants and subsequent commitment I would fully expect them to prove their worth. Both have been created out of Industry need, and to a large extent, dissatisfaction with the way the market has evolved.
What do you see as the biggest challenges and opportunities for 2015?
Going back to my earlier point, I think it is going to be around the best execution piece and trying to come up with some practical definitions which allow us to turn an art into a scientific, proven process.
It won’t be easy because of the diverse and fragmented nature of the markets but the aim is to get the best available price for the client.
David Miller is the head of European, Middle East and Africa equity trading for Invesco. He started his career in 1984 as a dealer on the London Stock Exchange, working with Smith New Court trading mainly smaller companies. In 1995 he was involved in the creation of the UK’s first Order Driven Exchange, Tradepoint, where he was market controller. Miller returned to trading with Knight Securities in London in 2000. Prior to joining Invesco in 2001 he spent some time with Virt-x as a trading consultant as they launched a pan-European exchange.