Commentary

John Turney
Traders Magazine Online News

Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

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May 26, 2005

From Tech Analyst to Trading

By Nina Mehta

Munder Capital Management's Ben Upward loves the competition of trading. "Trading suits my personality," he says. "It's fast-moving and requires many intraday decisions." Upward joined Munder in 2000 as a junior analyst. He covered REITs and technology. But when a trading job opened up 12 months later, he made the switch. He's now a senior equity trader.

Upward and head trader Dennis Fox divvy up all trades for Munder's mutual funds. Both execute trades across sectors and markets. Two others help with trading and backoffice duties. Munder has $38 billion in assets under management. Upward trades from Munder's main offices in Birmingham, Mich.

In the few years he's been at Munder, trading has been radically changed by advanced technology as well as direct market access. "There's much less block trading, especially with the popularity of ECNs and the increase in algorithmic trading," he says. "I am more anonymous than I was in the past."

Upward adds that using the new systems helps to reduce market impact, "by letting us control the display amount and the level of aggression on trades." Still, with more trading venues, traders must work hard to access liquidity. Munder's micro-cap and small-cap funds have grown in assets over the last few years. And this has resulted in bigger orders. Upward and Fox now regularly get orders to buy a few hundred thousand shares of names that usually trade an average of 10,000 shares per day.

Upward notes that the desk was once totally dependent on third market brokers. The broker would call the top 10 holders of a listed or OTC stock, seeking a seller. "Now we can keep a piece of the order in Liquidnet and a piece in Harborside, and we can bid for some in an ECN like Instinet or B-Trade. We'll also send some to ITG's POSIT match and check indications of interest through Bloomberg or AutEx to see if there are brokers that have the other side of the trade," Upward says.

"The stock may trade an average of 10,000 shares a day," he adds, "but we try to put ourselves in a position where we can capture the one big-volume day in the month."

Execution costs and the unbundling of research are also changing the way Upward and other traders conduct business. Munder is a fundamental research money manager, so it has many research bills. The firm uses more than 50 brokers, but is now reducing that list. Munder, to encourage more transparency, recently began testing commission-sharing agreements. These are used to pay for research from smaller brokerages without having to execute trades at these firms. Munder, for instance, might trade with Instinet but add an extra penny to the commission. That allows Munder to build a kitty' at Instinet. The kitty can then be used to pay boutique shops for research. Under this arrangement, buyside firms can meet their soft-dollar and research requirements while pursuing their best execution obligations.

Another focus for Munder is reducing transaction costs. The money manager uses Plexus Group for quarterly transaction cost analyses. The goal is to understand trends in execution quality that have developed over previous quarters. Munder's CIO attends these quarterly meetings. The trading desk also uses pre-trade and post-trade analytics to assess daily trading costs, especially for programs. "But we try to avoid getting into a situation where we're looking at statistics every day and making knee-jerk reactions to adapt to the data we're seeing for that day," Upward says. There's a risk in getting distracted by real-time transaction cost analysis that's not anchored to the big picture, he adds.