Bob Gauvain, head trader at Pioneer Investments, has been around the securities industry a long time.
At 16, Gauvain was a messenger for the Boston Stock Exchange Clearing Corp., delivering stock certificates to the exchange’s member firms. He worked part time on the exchange floor throughout college on the recording desk. There, he made sure that as trades were executed, each went on the tape. He also kept track of the total volume of shares traded solely on the Beantown exchange.
Those tasks turned into a lifelong career for the former part-timer. Gauvain has now been head trader for the past 21 years at Pioneer Investments, which was a mutual fund firm with four funds and $4.6 billion under management when he started and now has more than 100 funds and global assets under management of $204 billion.
“The business was fascinating to me. I fell in love with it,” he said.
Of course, the business has changed a bit since Gauvain joined Pioneer in 1984 to trade small-cap and Nasdaq-listed stocks.
“The quote monitors at the time were static. If you punched in a quote, the quote would stay the same unless you punched in another quote,” he said. “And when you did an execution, you handwrote the execution onto the trade ticket. Then you manually had to figure out what funds got what execution. So it was paper and calculator. The order management system was your traders.”
Technology has wrought dramatic change, Gauvain said. Among other things, trading technology enables Pioneer to do more with fewer people. “My group of five traders is doing what six or seven people used to do, and now they are also handling fixed income trading,” he said.
Both buyside and sellside traders’ roles have changed, as well. “What used to be done by brokers can be done by buyside traders themselves off their desktops with algos and execution management systems,” Gauvain said. Indeed, close to 50 percent of the firm’s equity business is now done away from the traditional broker’s cash desk, he said.
“Algos are taking on a lot of the role of what a sell-side trader used to do,” said Gauvain. Traditional brokers’ desks “are still very important, but the buy-side traders do a lot more than they used to do.”
CROSS-TRAINING
Pioneer’s trading team includes Eddie Doyle, who focuses on value stocks; Sofia Sermos, whose specialty is core stocks; Dan Sim, growth; Nick Lambros, international, and Mark Phillips, fixed income. Phil Colburn is the trading assistant.
The traders are cross-trained—all of the equity traders can trade anything on the equity side, and each one is also picking up a different piece of the fixed-income business as well, he said.
“Once we brought fixed income into the trading room two years ago, rather than having silos, we took a hybrid approach,” Gauvain said. As a result, the traders “are more conversant in the market as a whole as opposed to their subset of it. It helps their trading.”
Gauvain calls the group’s trading style “liquidity-based,” at this point.
“We’ll trade anywhere on any platform to buy the most amount of shares at the best possible price for the least amount of commission,” he said. {IMGCAP(2)]
The team uses algos provided by bulge bracket firms across the whole spectrum of trades, he said. By using brokers’ algo platforms, Pioneer gets a credit that the firm uses to pay smaller research boutiques that might not have a trading desk or a good trading capability.
About 40 percent of Pioneer’s equity transactions are done via algos, Gauvain said. Algos enable traders to maintain anonymity, he said. “With a cash desk, you have the risk of having a phone call made by the cash desk to mess up the picture.”
Most algos touch dark pools, and part of the traders’ job is “to know which destinations you want to touch, and which ones to avoid,” Gauvain said. “Not all dark pools are alike. That’s the benefit of a desk that knows what lies underneath the surface.” Every order has leakage, he said, and “we want to minimize that.”
Pioneer’s trading desk has performed very well in the last two years as measured against the Abel/Noser universe, Gauvain added. The group ranks in the top quartile of Abel/Noser’s Average VWAP category of buyside firms, which is measured from the time the trader receives the order until close of business at 4 p.m., he said.
RISK MITIGATION
The biggest challenge Gauvain faces in his job as head trader is risk mitigation and minimizing trade errors.
Pioneer uses the Charles River OMS, which can send orders to a broker, an EMS, an algo or an execution venue. “A portion of the executions within an algo package touch dark pools and other execution venues,” he added. The completed executions go back into the OMS. “So we have a good order history and an excellent audit trail,” Gauvain said.
“Everything is connected. You don’t want to go from one machine to another. Nothing is relayed to the broker via phone—everything comes off the desktop, so you don’t have the issue of 5,000 becoming 50,000 in the broker’s ear,” he said.
Even so, buyside traders do worry about high-frequency traders, said Gauvain. HFTs looks for patterns that aren’t normal for a stock, he said.
“If you are engaged in the market and trading minimum lots, you’ve tipped your hand and are allowing the HFTs to work against you,” he said. To minimize that, traders “put their securities in on a limit so you are not actively in the market and don’t engage in minimum lots. You can step back and wait for the opportunity to trade big pieces instead.”
Traders like HFTs have always been around, said Gauvain, comparing them to the Small Order Execution System bandits of the 1970s and early ’80s. “They are predatory. They’re in the business to make money, and we’re in the business to make sure we’re not losing money.”
HFTs “built a dynamic mousetrap,” he said. “The question is, do you regulate them? And if so, how?”
As for new technology, Gauvain is currently more focused on the fixed-income side, as this is a focus of the Dodd-Frank Wall Street Reform Act .
“In the next five years you’ll probably see more technology geared to making fixed-income trading more transparent and liquid,” he said.
Under Dodd-Frank, “there will be a lot more reporting going forward,” he said. “Transparency is good.”
