Quantitative Difference

How Head Trader Scott Wright's advanced trading technologies and management strategies are driving AXA Rosenberg's growth

More than three years after a scandal that gravely damaged its reputation and led to the loss of more than $50 billion in assets under management and almost all its U.S.-based investors, Orinda, Calif.-based money manager AXA Rosenberg believes it is on the upswing.

Outflows have stopped, assets have inched up to $23 billion, and the firm has beaten its performance benchmarks for the past three years.

Back in April 2010, the firm disclosed to clients that a computer error in its quantitative investment process had been covered up by senior managers. A year later, the Securities and Exchange Commission charged the firm with securities fraud for concealing the error, causing $217 million in investor losses.

AXA Rosenberg agreed to settle the SEC charges by paying $217 million to harmed clients, plus a $25 million penalty, and by hiring an independent consultant with expertise in quantitative investment techniques to review disclosures and enhance the role of compliance personnel.

AXA had already seen its assets under management halved to $70 billion in the 2007-2008 period when the whole quant section fell out of favor. With the scandal, it saw another outflow of more than $50 billion, and assets declined to $21 billion in 2011.

There can be opportunity in crisis. In 2010, Axa Rosenberg offered employees a buy-out package and the two co-heads of trading took it. The firm then tapped Scott Wright, who had started there as a consultant in 2005 and began trading in 2006, to head the desk.

Wright, now head of trading for the Americas, focused on managing relationships to make sure AXA didn’t lose credibility on the Street.

“I kept relationships current by making sure commission dollars, even though they naturally fell to all-time lows, seemed as though they were being funneled in the right direction,” he said. “Because the Street can easily hurt you if you appear to be a wounded dog.”

When Wright began consulting at AXA, he had a mandate to integrate FIX into their proprietary OMS and to convince traders it was smarter to send electronic orders than to give them over the phone.

He had a background in trade floor support at Barclays Global Investors and Schwab SoundView Capital Markets, where he supported the electronic trading desk for the program trading group. Among other things, he taught the traders at Schwab how to use algorithms, and that started his career as a trader.

That background has served him well. Will Geyer, now a managing director at ITG and global head of the firm’s platforms business, was at one time head of U.S. equity trading at Barclays Global Investors and worked with Wright then. Later, when Geyer was on the sellside, managing Citigroup’s global alternative execution business and serving as CEO and president of JonesTrading, Wright was one of his customers. Geyer says Wright “has a broad knowledge of not just trading but also the technology that surrounds it. He has an insightful view of how things work and why things work.”

Wright is one of those top traders who “appreciates the intersection of technology and execution,” Geyer said. He has “an understanding of where trade automation works and when it doesn’t, and when you need to provide a different course that adapts to the market environment.”

Said Wright: “I do understand how things are built. Since I know there are shortcomings in rule-based trading, I can step back and say it’s better to trade something with a larger set of rules-a human brain.”

UNIQUE TRADING STYLE

AXA is a quant shop, where the firm’s model chooses stocks based on fundamentals rather than what’s happening in the marketplace. The firm seeks to capture both short-term earnings growth and a long-term earnings advantage, through rigorous fundamental analysis. AXA selects stocks the model has identified as, on average, slightly misvalued relative to similar stocks.

The firm’s unique style of trading is intended to be a backstop for the model’s picks, because those selections are not made with regard to current market developments. That’s why traders there don’t have to complete the orders if something is happening that the model can’t know of.

For instance, the model might be saying to buy SanDisk, but Cisco may have just made an announcement that affected SanDisk’s price, Wright says. In that case, trading in the stock is stopped. The portfolio manager freezes the stock, reoptimizes the portfolio-and a new recommendation comes out. Optimization involves determining mathematically the best return-to-risk tradeoff, given the model’s forecast of return and risk.

“Because we deal in similars, we don’t deal in specifics, it’s easy for us to find another name to address it,” Wright said.

There’s another big difference between the AXA desk and most others. Contrary to do-it-yourselfers, 20 percent of the firm’s orders are done via algos and program trading and 80 percent via brokers’ cash desks.

Wright says that algos don’t normally beat the benchmarks. They typically come close but miss. “So I’m missing two to three basis points every day on my algorithmic trades, where my cash desk usually beats the benchmark,” he said.

AXA tells its brokers it expects them to trade as if it were their own money. If a trade isn’t making sense, they should go back to AXA, because the money manager can always come back to them with a different order, Wright says.

Most of the brokers the firm uses are an extension of the desk, Wright says. The brokers and traders the money manager does business with have been with it for quite a while. Even though a trader may move firms, AXA moves with the trader, rather than stay with the firm.

AXA has no preference about whether it uses full-service or agency brokerage firms, but it has found that bulge bracket firms don’t provide the level of attention AXA is looking for, because its commission dollars are lower than some other money managers’, Wright says. So AXA tends to stay with the smaller firms.

ALGO SURVEILLANCE

The drawback with algos, says Wright, is that “even though some algorithms have tried to incorporate factors outside of what the name is doing, they are still just machines. You still have to be able to recognize that the thing that you are doing is not smart because of things that are happening around it, rather than just focusing on the trade itself.”

So although AXA’s brokers may use algos for an order, they watch and stay on top of each order, Wright says. That enables them to take advantage of market movements, holding back a percentage of the order to take advantage of the intraday lull, for example, he says.

Of course, algos still offer important advantages. “We want to take advantage of uninformed flows, so I still want to participate in dark pools and every algo that I can, because it gets fed by retail flow which is uninformed,” Wright said.

The end result of this trading strategy? Over the last six months, AXA Rosenberg is four to six basis points over its interval volume-weighted average price benchmark, Wright said. When commissions and costs are factored in, the firm is still positive by 2.5 to 3.5 basis points, he says.

At the time of the SEC settlement, the firm’s three trading desks-in New York, London and Singapore-were silos, each with its own technology and tools, Wright says. As part of an effort to increase transparency across the firm, they now trade the same way and use the same tools. That allows them to share information, Wright says.For instance, the U.S. leads in algo production, so when a new algo comes online, the U.S. desk normally gets it first and offers its findings to the other offices, he said.

The arrangement makes AXA Rosenberg more competitive because “my relationships in the U.S. are seen by the European desk. So if we tend to trade a lot more with Barclays, we negotiate better rates on the trades that we do.”

In late 2010, AXA Rosenberg announced that Jeremy Baskin, previously head of the active equities division of the Northern Trust Company, had been named CEO. During his 22-year career at Northern Trust, Baskin was responsible for the global passive business, as well as building the research and investment infrastructure for risk-taking value-added quantitative equity strategies.

As head of the active equities division, Baskin was responsible for all global fundamental and quantitative portfolio management and research, managing around $24 billion in assets.

Said Geyer: “The organization is really positioned well to value trading’s contribution” because new CEO Baskin values trading and understands what trading can do. “That empowers Scott to be able to contribute in a really meaningful way.”

The organization is really moving in the right direction under Baskin’s leadership, Geyer added. “It’s been a tremendous turnaround of the company, and he’s very well respected in the industry.”

Wright agrees. Baskin “brings a unique depth and understanding because of his background in trading. He understands much deeper what’s entailed in trading,” Wright said.

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