NEW CHALLENGES, NEW OPPORTUNITIES.
Steve Garrard, EMEA head of equities sales trading at Citi, explains how the broker is responding to a changing environment.
What impact has regulation had on the equities trading environment over the past year?
There have been several changes over the past few years which have had a significant impact. They range from the French and Italian Financial Transaction Tax to the more recent implementation of T+2 settlement to the Financial Conduct Authority’s thematic reviews on best execution and the dealing commission regime. In many ways we see these changes as new opportunities. For example, take the Scandinavian markets which are dominated by local brokers. Unbundling enables Citi to offer a global commission sharing arrangement and access the flows and liquidity which previously resided domestically in the region.
What effect do you think MiFID II will have?
The 4% and 8% caps under the reference price waiver will certainly have an impact. Our clients tell us there is value, and a need for non-displayed liquidity to achieve cost effective execution. The caps could potentially impact that. One of the outcomes is that we may see an increase in blockier type trading via the large-in-scale (LIS) waiver which is not affected by the caps. I also see flow moving from non-displayed venues to regulated exchanges and lit MTFs. The LIS waiver, we hope will help to improve execution quality for large orders.
Has the ability to achieve best execution improved since MiFID I?
MiFID I has resulted in an increase in fragmentation and it has in theory become harder for the sellside to achieve best execution. The challenge for the buyside is that best-ex is defined by the sellside that is executing the order, so there is no standard. However, the industry has been focusing on building the tools as well as fine-tuning and adjusting the strategies accordingly. We assess new venues, the fragmentation of the liquidity and our abilities to achieve best execution. I think the monitoring process for best-ex has become relatively commoditised and available to not only the larger but also smaller to medium sized clients. It is incumbent upon the sellside to have fully disclosed policies and procedures around venues they interact with and who interacts with client order flow.
There has been a lot of press about the buyside taking greater control of their executions. How has Citi responded? Did you have to restructure your execution services?
We have encouraged our buyside clients to take greater control of their execution process. We offer the entire product suite and execution service ranging from low to high touch which is still in demand because of the proliferation of venues. Clients have also increasingly preferred to have a single point of contact over the past two years. They like to have one person who can assist with the execution of the order but also has the skillset to trade via high and low touch channels and across different geographies. Multi-asset skills are also in demand as there are several multi-asset funds holding equities.
Clients though do differ and some will put programme and electronic trading together for a low touch service while others are prepared to pay for liquidity provided by a high touch sales trader. We are also seeing clients build into their order management systems the ability to trade on an order-by-order basis via a low touch electronic service with high touch visibility.
I read Citi made a number of senior appointments within its European equities business last year including Sam Baig as new head of execution platform for EMEA. What is the reason behind this as well as his new role?
There is no doubt that the market and trading has become more complex due to the rise of new venues as well the increasing sophistication of the buyside. We decided we needed a much more thoughtful approach to execution in terms of how we look at the venues we connect to, the composition of those venues, the depth of our book, the bid/offer spread and the profile of market makers.
We also have a large inventory of stocks that can be made available and Sam was brought in to look at all the pieces of liquidity that reside on the trading floor to see how we can better consolidate that liquidity and the crossing opportunities that can take place.
Can you please tell me a bit more about your new Total Touch product and other products in the pipeline?
We launched Total Touch in the US in 2010 and it was extremely successful. It allowed broker dealers to transact hybrid block orders on a bespoke electronically basis. The average trade size of this hybrid block pool at Citi was 65038 shares versus average dark pool prints of 228 shares. The product suite supports over 3,500 securities worth $20bn in the Americas and we launched it in Europe in September 2014, with initially 560 symbols. It currently supports 680 securities across 13 sectors, 7 currencies and 16 countries in the region, representing approximately $3bn of actionable liquidity. The aim is to maximise block transactions whilst signalling and minimising leakage from a client perspective.
In Europe, we started the offering in ordinary shares and exchange-traded funds but have plans to roll it out into ADRs (American depositary receipts).
I read that Citi is among several banks looking to set up a new European equity venue called Plato. Is that still on the cards and if so, what are the drivers?
Very much so on the cards. Plato is a consortium of asset managers and brokers dealers, which are collaborating to create a not-for-profit trading utility in Europe. The consortiums key aims are to increase transparency, reduce trading costs, simplify market structure and act as a champion for end investors
One of the areas we are particularly excited about is the Market Structure Innovation Centre. There has been a lack of independent academic research covering European Market Structure and the Plato initiative will look at filling that gap by sponsoring academic research to improve innovation and help inform the market structure debate
What do you foresee as being the biggest opportunities as well as challenges this year?
In terms of opportunities, we are well positioned in the wholesale markets with our execution to custody (E2C) solution, which has become increasingly relevant for our clients in the current environment and facilitated by the recent integration of our markets and securities businesses. It cuts out the middle piece of the clearing and settlement process and reduces the cost per trade by automatically generating client settlement instructions based on predetermined information supplied during implementation.
As for challenges, the regulatory process will continue to be consuming for the business.
Steve Garrard, who has been at Citi since 1999, is responsible for running equity sales trading within Citi’s EMEA Institutional Client Group. Prior to joining Citi, he worked as a sales trader at Smith New Court which was taken over by Merrill Lynch in 1995.