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.
During his 16 months as global head of equity trading at Morgan Stanley Investment Management, Ray Tierney has instituted a number of initiatives–all in the name of increasing access to liquidity and driving down trading costs. “To me, there is an enormous amount of opportunity that can be captured if we manage [our desk] properly,” says Tierney, a 26-year veteran of brokerage sales and distribution, his last 15 at Morgan Stanley.
Tierney, described as “intense” and “high-energy” by colleagues, hasn’t wasted time in his transition to the money management division with $265 billion in equities. He has introduced new technology, upgraded systems and streamlined the processes under which the global trading desks operate. That included an upgrade of the LongView order management system, the addition of execution management systems (EMSs) and algorithmic trading, an expansion of the role of trade-cost analysis (TCA) and the introduction of guidelines for best practices.
A more subtle move has been his quest to change the mindset of those doing the trading at six desks around the globe: New York, Houston, London, Tokyo, Singapore and India. Tierney wants MSIM’s traders to act more like sales traders than traditional buyside traders.
“In general, buyside desks view themselves as a service bureau for the investment team, which, to me, inherently means that they’re an agent,” Tierney says. “And breaking people out of that agency mold or mentality takes time. Owners take responsibility; agents take none.”
In short, Tierney wants to hold everyone who touches an order at MSIM to a higher level of accountability, from the traders on his desk to the brokers whose traders and low-touch electronic trading tools execute the firm’s business.
TCA’s Answer
Part of that quest for accountability includes the use of TCA. By the end of the quarter, Tierney expects to have a TCA upgrade from a vendor he declined to name.
The new version will incorporate three additional time stamps, including portfolio manager and various trader handoffs. The five time stamps will allow MSIM to keep closer tabs on what happens to orders throughout the life of a trade.
This will allow the firm to better track performance and get a clearer view into the trading process. The upgrade will also allow MSIM to capture the type of algorithmic strategy the MSIM trader used for a particular trade and dig into how the strategy performed.
Right now, the system only reports the name of the broker, not the strategy. “We might find, for example, that we’re using the wrong tool for a market cap or sector,” Tierney explains. He thinks that TCA will allow the desk to better understand “what behaviors, strategies and relationships drive our implicit costs of execution.”
While the former sales trader admits that trading is as much art as science, he says TCA can be instrumental in pointing out patterns that hurt performance. “The idea is to change behavior where it needs to be changed,” he says. “And that goes both internally and externally.”
To emphasize the importance of TCA to his strategy, Tierney created a senior position responsible for analyzing the cost of trading. He tapped Robert Shapiro from TCA vendor Abel/Noser Corp. to oversee the firm’s in-house project to rein in costs.
In-House
Tierney says the focus of Shapiro’s role is to find ways to lower implicit costs-market impact, bid/ask spread, delay, tracking error and information leakage. Implicit costs for trading can be as much as nine times the actual commission charge, according to industry estimates.
Therefore, annual implicit costs at MSIM, as with other big managers, could be in the “billions of dollars,” Tierney says. And for MSIM, capturing some of that could add basis points to performance.
The EMS will become the quarterback of the firm’s electronic trading effort. The goal is for traders to perform both pre-trade and post-trade analytics off the EMS, not the OMS.
Tierney thinks this will make traders more efficient when they can use these tools on the same EMS that sends their trades into the market. When that happens, traders will have better access to liquidity, he says. The firm uses both ITG’s Triton and Bloomberg’s offering as its EMSs, and both firms are currently working on an upgrade that will bring pre- and post-trade analytics to their system.
The move to EMSs is part of MSIM’s larger strategy to make trading more seamless at the firm. And the integration of pre- and post-trade analytics into the EMS platform is an integral step, Tierney says.
Despite the dramatic increase of electronic trading in a short time, Tierney stresses that MSIM is still looking to trade in size whenever it can. Yes, it has increased its electronic trading to about 40 percent of its flow, but that still represents less than 20 percent of its commissions. There are still plenty of commissions to go around.
With the rise in self-trading, though, MSIM’s blended rate dropped to less than 3 cents a share in the U.S. That represented a drop of its total commission payout by about 22 percent since instituting algorithms upon Tierney’s arrival.
Despite trading more of its own orders, MSIM has worked to maintain relationships with brokers it has deemed strategic by giving them a larger slice of the commission pie through client commission arrangements, or CCAs, in the U.S. (In Europe they’re called CSAs, or commission-sharing arrangements.) The firm started CCAs in July of last year, and shortened its list of global trading partners from about 270 firms down to roughly 50.
Up the Charts
MSIM has essentially unbundled research from execution through its CCA program. The desk votes for its favored execution partners, based on liquidity, capital and service. In other words, a firm could get additional flow by being a good execution partner.
Tierney says the firm has created what he thinks is a fair but competitive “jump-ball environment” for brokers. Prior to beginning to use CCAs, Tierney says, the difference in the amount of commissions paid to the No. 1 broker and the No. 10 broker was minimal. Now, that gap has widened to about $11 million. In fact, he says, two research brokers that were ranked between No. 25 and No. 30 before MSIM started using CCAs have rocketed into its brokerage top 10.
How could that happen? Tierney’s response is an acronym: “IOIs.” Indications of interest are the main reason. Tierney says that firms offering opportunities for MSIM to interact with liquidity-natural flow, IOIs or capital-will garner more business.
“I’m agnostic as to who wins the game. I’m creating a jump-ball environment, focusing on differentiated liquidity-capital and service-for the sole purpose of achieving execution concentration,” he says, adding that a competitive environment among brokers shouldlower hisimplicit trading costs. “There is now an incentive process in place for our brokers to capture additional share and dollars.”
Separately, in the U.S., the Houston and New York trading desks were restructured. Last October, the firm downsized from 15 to 11 traders, due to increased efficiencies from technology enhancements. Tierney named Elizabeth Brown in Houston head of U.S. equity trading. Prior to that, there were two heads of trading in the U.S., and there was no unified message to the Street coming from MSIM. That is no longer the case, Tierney says.
In addition, the Houston desk trades all large-cap stocks with market caps in excess of $5 billion. New York has small caps, real estate and program trading.
(c) 2008 Traders Magazine and SourceMedia, Inc. All Rights Reserved.
http://www.tradersmagazine.com/ http://www.sourcemedia.com/
