NAVIGATING THE AUTOBAHN.
Deutsche Bank has spent the past two years building a new trading route. Rob Flatley, talks to Best Execution about the autobahn Equity electronic trading platform which encompasses direct market access and algorithmic trading.
Can you tell me about the development of autobahn Equity?
Our Platformautobahn is an electronic distribution platform that offers execution services in different asset classes such as equity, fixed income, futures and options. The electronic equity platforms grew from mature cash and prop trading desks which were traditional businesses that had electronic components. When I joined Deutsche in 2006 every bank was continuing to transform their business models making electronic execution a core business strategy rather than merely a means of execution. The biggest challenge for me was to build a global platform and put a together a global team. I needed people who understood how to transform workflow from a traditional base to an electronic platform on a global basis. Today, we trade electronically in 62 markets. It helps us to be the first into many emerging markets as we can build better understanding into their regulatory, post trade processes and market microstructures.
What were the biggest challenges building such a platform?
It took us about two years to develop a set of market leading features we have today and the platform can be accessed from nearly every buy-side order management system globally. There were main two pieces of work. Firstly, from a distribution perspective consulting with and educating our clients on the finer points of our platform. As buyside is taking more control of their order flow it is important to explain how our products work and how they are integrated with the markets. Fund managers are at different places on the learning curve depending on their size and requirements. However, they are all focused on razor sharp execution, predictive analytics and measurement. For us, that means not only having people who understand the technology but also can navigate a complex conversation.
And the second challenge?
The other issue was market structure. The changes in regulatory frameworks in the US and Europe coupled with the increase in volatility mean an explosion of market data and venues. That presents a significant challenge from a technology standpoint. Think of London in 2005. There was one place to send orders and for accessing market data. By contrast, in 2010, there could be 10 places and ten times as much data. The benefit of market centre competition is that trading costs go down but the technology spend increases as you have to deal with more complex structures and systems. The markets are changing all the time which means we need to be ahead of the curve in terms of market structure details and products.
I know you have made investments in other networks. What is the strategy behind that?
If you look at the US, there were over170 investments by brokers in exchanges and ECN’s over the past six years. That investment wave was initially started by brokers who were fearful that NASDAQ and New York Stock Exchange’s consolidation of ECN’s would give them absolute pricing power. As a result, broker dealers started to invest in start-up and regional exchange platforms. For our part, in the US we bought a minority stakes in BATS Trading and BIDS Trading. In Europe ,we are one of the shareholders of Turquoise for both strategic and tactical reasons. We have our own views on market structure evolution. Additionally, no one wants to be the last one in trying to figure out how a trading venue works. We would rather exert influence from the beginning to better understand the regulatory issues and trading mechanism and to ensure that our technology is up to date and compliant.
How do you see the European trading landscape unfolding?
I think we will see many aspects of the US evolution unfold in Europe. We will see new players pile in and as with any industry, the models that are good will rise to the top while those that aren’t will fall to the bottom. There will also be some consolidation after the growth in venues. The difference, between the US and Europe is that things will move at a much faster pace in Europe than in the US mainly because a great deal of the work has already been done in terms of modern exchange technology and routing frameworks. For example, in the US, it took time for firms such as Pipeline and Liquidnet, which have non displayed pools, to adapt to sellside flow. They can plug that into Europe immediately. Today, we are well past the experimentation and adoption phase and are much farther along in the evolutionary cycle. We have a platform like Turquoise ready to trade in both dark and light pools from day one.
How has trading changed since the credit crunch?
Prior to 9 August 2007, stocks traded more or less the same pattern for the past three years. After the subprime crisis, volatility spiked, spreads have widened and there has been significant whipsaw price activity. This has led to an increase in trading volume along with a marked decrease in transaction size throughout the period. And when that happens, there are more transactions in the marketplace, which makes it extremely difficult, in terms of physical human reaction time, to actually trade even familiar stocks manually. The increased velocity in turn puts the emphasis on automation. Firms who were not fully electronic are now saying lets make the changes now in order to deal with the volatility.
What are the future plans for autobahn?
We have started to roll out our new product called optimal portfolio execution (OPX) which enables traders to specify stock and portfolio specific instructions. Typically, algos (algorithms) worked on a single stock basis with parameters built around one stock. However, this did not consider portfolio level instructions. Portfolio instructions were enforced more or less manually. We started this project before the credit crunch but it has become particularly useful with the increase in volatility and unexpected events such as spike in the oil price. For example, fund managers can add instructions around the movements of the NYMEX (New York Mercantile Exchange).
As this and other projects require a mathematical and quantitative techniques, we pulled people together from the derivatives area of Deutsche Bank to work on electronic equity the projects. We have used OPX on our programme trading desk and now we are in the process of educating our clients about how to use it.[Biography] Rob Flatley is a managing director and the global head of autobahn Equity at Deutsche Bank, is chair of the firm’s global equity market structure committee and sits on the boards of numerous exchanges. Prior to joining Deutsche, Flatley was managing director of electronic trading services at Bank of America where he oversaw the firm’s expansion into the space. Before that, he was chief operating officer of Macgregor and senior vice president of worldwide sales of Financial Technologies International. ©BEST EXECUTION