Help Wanted: Global money manager looking for a head trader with sellside experience, knowledge of hedge funds and various asset classes, as well as a strong understanding of technology and quantitative tools needed in an effort to streamline trading processes and lower trading costs at a global organization.
Over the last two years, that could have been an ad for the last handful of top trading jobs at big buyside shops, all of which went to former sellside trading veterans. Ironically, just a half-dozen years ago, these Wall Street pros probably would not have given these jobs a second look.
But that’s not the case today. Part of the attraction, says one observer, is that sellside pros are viewing these buyside positions as challenges-they require restructuring entire trading operations, from the processes to the technology. The fact that these jobs are at big institutions that pay well doesn’t hurt either, as the spread in pay between the sellside and top buyside jobs has narrowed, he adds.
Brian Conroy, a sellside and hedge fund veteran, began the trend just over two years ago when he joined Fidelity Investments. More recently, Rob Arancio joined Neuberger Berman from Lehman Brothers, where he co-headed liquid markets.
Michael Gitlin, who has global and fixed-income experience, and most recently headed equity sales at Citi, joined T. Rowe Price not long ago in a newly created job to oversee global trading.
Trade-cost analysis pioneer Wayne Wagner says these hires of top managers indicate that the buyside realizes that it needs to do a better job to rein in trading costs with streamlined processes and better technology and analytics. “The institutions have been the laggards in this area,” Wagner says. “The hedge funds have been the leaders.”
This feature outlines the experiences of two former sellsiders who have taken top buyside jobs: Ray Tierney of Morgan Stanley Investment Management and Keith Gertsen of AllianceBernstein. Both men filled newly created positions and are restructuring their desks around the world.
There’s good reason why Keith Gertsen, global head of trading at AllianceBernstein, sounds like a risk trader when he talks about the business. He used to be one. Gertsen was global co-head of risk block deals in capital markets at Deutsche Bank in New York for two years, ending in 2004. He was among the first group of traders on Wall Street using their firms’ balance sheets to take on portfolios valued in the hundreds of millions of dollars. The job entailed redistributing some of that risk after the close.
There’s also good reason why Gertsen, a 14-year brokerage veteran, sounds at times like a portfolio manager. He did that, too. Gertsen ran a portfolio at a large hedge fund before joining AllianceBernstein nearly two years ago. While at the hedge fund, he did double duty and traded his portfolio.
Being both a portfolio manager and a trader, he says, might have been the best training for his current role in overseeing trading at AllianceBernstein, which manages $580 billion in equities. “My hedge fund exposure gave me a different perspective on the need to capture performance in trading,” Gertsen says.
Still, while it may have been Gertsen’s varied background-capital markets, derivatives, portfolio management and trading-that won him the top trading job at AllianceBernstein, his belief in the benefits of using quantitative tools fit into a larger theme at the firm. Quantitative analysis has become a valuable discipline even in the fundamental stock-picking process at AllianceBernstein.
That reliance on the quantitative is now happening in trading. “We’re trying to emulate the same type of structure they have on the investment side,” Gertsen says. The trading desk practices what Gertsen refers to as a “dual advocacy approach.” There is a fundamental focus by the traders, topped off with quantitative analytics. “We’ve married fundamental expertise with quantitative analytics and measurement,” he says.
Gertsen stresses that the desk is still very fundamental. It manages what he describes as an appropriate balance between various types of electronic trading and high-touch. The quantitative aspect of the desk comes from a group of quants who sit alongside the traders.
Inside the Trade
These quants use their math and computer programming skills to dig deep into the trades and analyze them. As a group, they are referred to internally as “the quant lab.” They have varying levels of trading experience on both the buyside and sellside, Gertsen says.
The quants’ job is twofold. First, they look at ways to interact with the market faster and more efficiently. Second, they perform diagnostics, reviewing trades and drilling down into how algorithmic trading strategies have worked in the marketplace. That diagnostic process also analyzes the effectiveness-and costs-of high-touch trades. The quants are essentially an in-house trade-cost analysis service. They also work with technology to implement ideas and enhancements.
The feedback from this group has produced savings for its clients, Gertsen maintains, though he declined to provide specifics. “We’ve had tangible results,” he says. “We have quantitative trading research, so we can become smarter and better predictors of trades and costs.”
Volatility
Input from the quant lab was not necessary for AllianceBernstein to know to de-emphasize algorithms during the period of high volatility this past summer. “We didn’t use [algos] aggressively because we anticipated they’d perform erratically, given the high level of volatility,” Gertsen says.
The firm’s traders went to work, relying on their years of accumulated knowledge and experience with volatility, instead of turning to algos whose decisions derived from largely historical data. “You want to have very good, solid, fundamental traders maximizing wild price swings,” Gertsen says, “and taking advantage of big-gap scenarios.”
That’s a skill that sellside traders in equities and options have honed over years, Gertsen says. There’s a simple yardstick that tells traders their contribution to the investment decision, he adds: “If you’re capturing the best 10 percent of the volume of an order in any interval, you’re adding alpha. When traders capture the best prices, those traders are adding alpha, rather than just being average.”
One of the reasons behind hiring Gertsen was to improve the interaction between AllianceBernstein’s trading desk and its investment teams, making that relationship as seamless as possible. The first step to develop that process was to merge two separate trading desks a year ago. Until then, Alliance Capital, which favored growth strategies, and Bernstein, a value player, had separate desks in the same building.
The second step was a shift to sector trading in December. Each sector now has a trader for growth stocks and another for value stocks. That ties the traders into the research better, according to Gertsen. The traders also meet with their counterparts on the sellside about two or three times a week before the open.
These meetings are held at AllianceBernstein’s office and give the firm’s traders additional insight into how trends and company-specific news are impacting stocks. This also provides for a higher level of conversation with the sellside that AllianceBernstein can benefit from.
The traders become “the eyes and ears of the portfolio team as far as what news and events are driving short reactions in the market,” Gertsen says. “That’s a very similar model to what exists at hedge funds.”
AllianceBernstein did more than restructure its U.S. trading arm. The changes were global and included a number of system upgrades. That included improvements to LongView, its order management system; the introduction of execution management system Portware; and the consolidation of the Tokyo and Singapore desks into Hong Kong.
The movement to client commission arrangements was also part of that plan. CCAs allow a money manager to pay brokerage firms for research without trading with them. The payment comes from a brokerage account that resides with another broker, who forwards a check for the research.
AllianceBernstein has chopped its list down from more than 300 global trading partners and chopped it down to about 50 trading partners. CCAs have essentially allowed the firm to separate the costs of research and execution.
Unbundling
AllianceBernstein votes a hard-dollar amount for the research that each firm provides. If the firm is also a trading partner, AllianceBernstein will trade with that firm at a “full-service” commission rate-half is research, half is the execution. Once the research portion of that firm’s “chit” is paid, the commission rate for that broker then rolls over to an execution-only rate.
“Our blended rate is significantly below the Street’s. We never want to overpay for research,” Gertsen says. “We’re very much focused on maximizing our clients’ commission dollars.”
Still, Gertsen says, AllianceBernstein’s dozens of brokers do add value. The firm responds to capital, but does not seek it. And the firm believes in the strength of sellside relationships. “We try to look at our brokerage relationships as franchise dialogues,” Gertsen says. “We’re trying to create mutually beneficial scenarios.”
The relationship might also be enhanced because brokers are aware of Gertsen’s sellside experience, and that allows for some familiarity in discussions, Gertsen says. That’s particularly the case when AllianceBernstein is involved in a mega-block trade with a broker’s capital markets desk-something he’s familiar with from his days at Deutsche Bank.
Gertsen says old-school thinking that the buyside desk was a cost center is misplaced. “The buyside desk has an opportunity to grab alpha,” he says. The trading desk “is very much an additive to an organization if structured the right way.”
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