facebook linkedin twitter
Tuesday, May 13, 2025
facebook linkedin twitter

ON THE MOVE: Man Group Grabs Chambers as Head of Quant Investment

By
John D'Antona Jr.
-

Man GLG, the discretionary investment management business of Man Group, grabbed Paul Chambers as Head of Quantitative Investment & Research, a newly-created role within the business. He will lead Man GLG’s efforts in using quant techniques and alternative data to supplement and enrich the fundamental research process, working alongside discretionary portfolio managers to enhance the opportunity to generate alpha. Chambers came from Balyasny where he was a quantitative equity Portfolio Manager over the past 18 months. Prior to this, he worked at Man Group for nine years, most recently as Partner and Head of Equities at Man AHL, where he was responsible for systematic strategies trading equity index futures, cash equities and ETFs. Chambers will report to Teun Johnston, CEO of Man GLG.

If you have a new job or promotion to report, let me know at jdantona@marketsmedia.com 

BCS Global Markets appointed Alexey Bachurin as its new Head of Equities. Bachurin will oversee all BCS GM’s Equities Trading Departments. With more than 20 years of experience, he came from IFC Metropol. Earlier he worked at Metallinvestbank and Rennaissance Capital. He will be based in London and report to Global Equities Co-Heads EquLuis Saenz and Oleg Achasov.

GTCR, a leading Chicago-based private equity firm, promoted Michael Hollander to Managing Director, and Stephen Master and KJ McConnell to Principal. Hollander joined GTCR in 2008 and became a Principal in 2014. Master joined GTCR in 2008 and became a Vice President in 2012. McConnell joined GTCR as a Vice President in 2014.

Mizuho Americas landed Vamil Divan, Managing Director, as senior healthcare analyst covering large cap pharmaceutical and biotechnology. He joins an expanding healthcare equity research team that includes Senior Biotechnology Analysts Mara Goldstein, Salim Syed, and Difei Yang, and Healthcare Services Senior Analyst Ann Hynes, as well as James Yoo in Healthcare Specialty Sales. Divan joins Mizuho from Credit Suisse where he spent more than a decade as senior analyst covering the US pharmaceuticals sector. Prior to Wall Street, he worked at Pfizer Inc. and Roche. Divan is based in New York and reports to Head of Equity Research, Susan Gilbertson. [IMGCAP(1)]

Robinhood Markets grabbed Dan Gallagher, a former commissioner for the U.S. Securities and Exchange Commission, as a new Board member. Gallagher is Robinhood’s first independent board member. He was an SEC commissioner from 2011 to 2015, and is currently the deputy chair of the securities department at law firm WilmerHale.

According to Reuters, Alex Ehrlich, co-head of the prime brokerage business at Morgan Stanley, plans to retire at the end of 2019, according to an internal memo seen by Reuters and confirmed by a spokesman. Ben Walker, who also co-heads the business, will become the sole chief of the unit, the Oct. 7 memo said. Ehrlich joined Morgan Stanley in 2009 after roles at UBS AG and Goldman Sachs in a career spanning 40 years.

Nivaura, a regulated fintech company focused on primary market digitization and automation, announced that Chris Jones joined the company. He will focus on market structure and product strategy. Prior to joining Nivaura, Jones was Managing Director and Global Head of Local Currency Syndicate at HSBC for 15 years, working on a wide spectrum of international fixed income capital raising transactions. Before HSBC, Jones worked in a similar role at Deutsche Bank.

Goldman Sachs has hired Melissa Plaza-Marriott, who most recently spent more than four years at Morgan Stanley in its financial sponsors team, a spokesman confirmed. Plaza-Marriott, who began her career at Goldman Sachs in 2001, also previously worked in the financial sponsors teams at Lazard and Bank of America Merrill Lynch. She becomes a managing director at Goldman.

Digital Vega, an FX Options e-trading platform and provider of options trading solutions, announced three senior appointments:

Simon Nursey, Head of Asia. Nurseyjoins from Standard Chartered Bank, where he was Head of FX Options Trading in Asia since 2012. Prior to this he was Global Head of Currency Options trading at BNP Paribas for 17 years, working in both London and Singapore.

Asa Attwell, Head of Product Development. Attwell was previously Head of EMEA FX and Emerging Markets at Nomura. Prior to this he worked at BNP Paribas for 16 years in a variety of FX Options roles, concluding his time there as Head of G10 FX trading.

Laura Winkler, EMEA Relationship Manager. Winkler previous roles include Relationship Manager at Currenex, and FX Relationship Manager for the UK and Switzerland at Thomson Reuters. She joins from Luxoft Financial services, where she was a Relationship Manager.

The Evolution of Algorithmic Trading

By
Credit Suisse
-

When first introduced, algorithms were designed primarily for automation to mimic a trader executing orders in pursuit of specific benchmarks. In the second phase, brokers stressed qualitative analysis by leveraging real-time data from the order book to model their assertions, and tailor how model behavior would respond to changing market conditions. In the most recent phase, leading providers on the sell-side have begun to use quantitative measures into their execution strategies, most notably integrating machine learning principles.
 
Evolutionary Computing A Way Forward?
Looking back at the development of algorithmic trading and treating it as an evolutionary process, it is evident that no strategy is ever really complete. Algorithms must evolve! As such, the sell-side needs a dynamic framework that can support continuous measurement, analysis, and improvement.

In computer science, evolutionary computing is employed in problem solving systems based on the Darwinian principles of natural selection. The idea is a simile of the biological order: given a population of species, environmental pressure results in a ‘natural selection’ dynamic whereby the species with the most advantageous characteristics survive and grow in the corresponding environment. Though humans are the most powerful species on the planet overall, polar bears rule the arctic, lions rule the savannah, and sharks rule the ocean reefs. By applying the same principle to algorithm design, an evolutionary computing framework pits new and existing quant models against each other to identify the best suited strategy for trading orders based upon their particular characteristics.

Introducing AlgoKaizen™
Kaizen, a Japanese term, meaning ‘continuous improvement’ is adapted from the philosophy pioneered by the Japanese manufacturing industry in the 1930’s that suggests that there is no perfect model, and that ‘systems’ must be designed to evolve and innovate constantly. Credit Suisse’s AlgoKaizen™ is an evolutionary computing framework that automatically allows for the performance assessment of competing models by using child-level randomized trials to switch between them throughout the order lifecycle for every indivdual parent order. The trial results are grouped and classified to determine the best model for a particular set of order characteristics and market conditions. Trading strategies then select the winning model, which is at the heart of what is required for delivering ‘best execution’.

A defining feature of a VWAP strategy is that it must make an intelligent assessment of when to be patient and when to pay the spread within in its overall execution trajectory plan. For this example, assume you have an existing model, Model A, which waits for the scheduled bucket time to elapse before crossing the spread. A new model is introduced, Model B, which uses the same idea, but now adds a function to look at current order book imbalance and time remaining before the bucket elapses to vary its decision making. Both models are made available to the strategy, and for the duration of any order created, a set of child-level randomized trials are run that switch randomly between Model A and Model B, illustrated in Figure 1.

Spinning Wheels
With the introduction of the algo wheel, a challenge we all face is to measure performance on the basis of unbiased data that is statistically significant.  The most common form of data evaluation on the street is order-level randomized trials. At the simplest level, this tests two variants, A and B, by sending orders randomly in order to directly compare performances. Since the meaningfulness of parent-level randomized trials relies heavily on a large sample size of comparable observations over significant time horizons, the lack of turnover in several markets results in statistically insignificant observations. The AlgoKaizen™ framework solves for this problem by subjecting the two models to systematic child-level randomized trials within the duration of a single order. This process substantially increases the number of statistically significant observations even in lower turnover environments.

Furthermore traditional parent-level randomized trials assume that the extraneous factors like market regimes and order characteristics are balanced evenly across the different models. That does not always happen, and the resulting data prevents an apples-to-apples comparison. So using the traditional approach, a model that gets more data trading during inactive months could appear to be better than the model whose strength is trading around elections simply because that regime lasted longer. As the AlgoKaizen™ framework allows for child-level randomized trials on the same order it can accurately compare the effectiveness of models across different order book regimes (e.g. momentum, reversion, range bound scenarios). 

Figure 2 illustrates a sample of the data explosion created by using child-level randomized trials over traditional parent-order randomized trails. Algorithms benefit by being equipped to systematically apply the ‘fittest’ model that is statistically proven to be effective under a particular set of conditions, allowing for a more robust and accurate process of trade planning.

Future of Self Progression Framework:
At present, the bulge bracket brokers are experimenting with ways to improve the efficiency of rolling out new algorithms to the buy-side.  Just as how smartphone users now install the latest mobile operating system through a simple click of an “update” button, similarly evolutionary computing enables the buy-side to utilize the latest trade planning tools without needing to implement brand new algorithms.

The benefits of evolutionary computing does not stop there. We envision this framework will be especially important for clients who use Algo Wheels, where there is a need to optimize trading across multiple objectives and to turn around changes quickly.  It is important to note that having a customizable platform that can support automated randomized trial testing and trade segmentation is only a starting point. The key to any self-progression framework is the ability to perpetually create, measure, and deploy new trade planning models. To achieve this, the sell-side needs to be in constant dialogue with the buy-side to understand their order profiles and trading objectives. The race to find the ‘fittest’ quant models has officially begun!

Adding Value To Fixed Income With An EMS

By
John D'Antona Jr.
-

Fixed income markets have lagged in their adoption of trading technologies that are now so familiar in equities markets. Market structure and data quality issues have historically proven to be significant hurdles to overcome, for all participants, though that is beginning to change.

Many different protocols and venues have been devised for trading fixed income, although most of them have limited traction. This proliferation has proven a difficult challenge for most order management systems (OMS). They can usually cope with the traditional request for quotation (RFQ), and even some levels of automation around the RFQ process is possible with the right OMS.

However, they tend to struggle with open trading, the “all-to-all” model, where the trader both responds to and initiates requests. OMS haven’t typically been designed for this, whereas it is a function for which the execution management system (EMS) can excel.

The technology underlying most OMS is hindered by its primary purpose of dealing with portfolios, and from an architectural standpoint, is not well suited to aggregating the market in real-time. Portfolio construction, order management, compliance, operational controls, are generally the sweet-spot of the OMS.

In contrast, the ability to look at the market as a whole, aggregating disparate sources of market data, providing clarity over it, along with decision support, analysis, and automation capabilities, all at or around at point-of-trade, is where a fixed income EMS should be adding value.

Improving transparency and price formation
Traditionally, and still predominantly, fixed income trades via RFQ. Why? Mostly it comes down to transparency and price formation. It is very difficult, apart from in the most liquid segment of the asset class, such as US Treasuries, to determine whether a price being displayed, for example at an auction or in some dark pool, is actually a price that the trader should be executing a transaction.

Buy-sides typically haven’t had access to the large real-time data sets necessary to drive the process of deriving a fair price for the debt instrument they’re looking to trade. Nor typically have they been through a process of understanding what the cost estimate of that trade is. Yet, transparency drives liquidity, which is available at a price and usually at a premium. The problem is, because of a lack of transparency, buy-side traders don’t know what a fair premium is to pay for that liquidity. That’s the crux of the problem.

An EMS can provide aggregation that displays a clear view of all available sources of liquidity and price, and highlight opportunities for execution that are complementary to traditional RFQ methodologies.

Why is this so important? We all know best execution has the attention of regulators. Article 27 of MiFID II states that firms must take all sufficient steps to give the best possible outcome on implementing a client order. This means that firms have an obligation to adopt a rational process to demonstrate their best execution policy. They have to have a process in place to show that they’ve taken into account historic implementation of similar order, looked at in the context of current market conditions, and have a rationale to explain circumstances or characteristics that may justify deviating from how a similar order was implemented in the past.

Firms now have a requirement to create this process and demonstrate how they’ve facilitated best execution by following that process: “Telling the story of the trade”, to put it more succinctly.

Here is where an EMS can uniquely differentiate. Some OMS can implement parts of this function, but they lack the ability to capture and integrate all the sources of liquidity to facilitate the required level of price discovery. Once you’ve got a true consolidated view, then advanced execution methodologies such as trade automation, really start to come into their own.

Pre-trade analysis to drive automation of dealer selection and execution method
Historic prints, trades and quotes, when aggregated, allow you to perform detailed analysis into hit ratios, failed trades, active dealer/venue combinations, and more. Once you have the data, the analyses become quite straightforward.

The system has to capture all competing quotes, at the time of trade, and derive some kind of benchmark proxy (for instance, constant evaluated price or “best bid, best offer”) against which to calculate implied spreads for all quotes, at which point they can be ranked by venue and party. The next step is to summarise the results across fixed income securities with similar characteristics, and use this consolidated information to drive dealer selection.

Deriving value from liquidity metrics and confidence scores
Regardless of asset class, most trades arrive in an EMS from a portfolio manager. But, fixed income trading is unique because a major part of the task for a dealer is to be able to come up with so-called “wish-lists”. These include “noise” around a particular bond, such as another trader’s axe or position.

Ideally, you want your trading system to identify these potential sources of liquidity. However, when there is a universe of several million bonds to scrape, that can become quite a challenge. Tools such as FactSet’s Universal Screening provide this function by providing a way to target a list of bonds with the characteristics that you may be interested in. A screening tool integrated with the capabilities of an EMS gives traders a differentiated capability to capture, save, utilize, and act on opportunities.
Moreover, combining universal screening with trading information would enable a firm to derive, for any set of fixed income securities, a series of liquidity metrics, as well as a confidence score, around the likelihood of a given bond to trade. With metrics like these available, orders coming onto the trading desk from the portfolio manager are more likely to be completed.

OTC electronification in FX a history lesson into how FI execution is likely to evolve
Although past performance isn’t an indication of future results, when it comes to the evolution of electronic OTC trading, fixed income is closely following in the footsteps of its OTC predecessor, foreign exchange. Prior to the millennium, FX was traded predominately via the telephone, and even today, high-touch FX workflows are still prevalent in the market — although they are fading quickly.

When looking at the electronification of the OTC market, the leading indicator of its success is the liquidity provided within the market itself. Foreign exchange has proven to become a highly liquid market via electronic RFQ, and FI is closely following in its footsteps. Any trader today executing G-10 currencies under $50M is almost guaranteed to trade it electronically in competition. Likewise, in fixed Income, those traders looking for liquidity for on-the-run treasuries and government bonds, can find it electronically in competition via RFQ.

As the evolution continues in fixed Income, it’s reasonable to expect that in time, many liquidity providers will begin to offer liquidity directly to venues via their own pricing APIs in order to realize internal cost efficiencies.

Hedge Funds Gain 0.32% in September According to Backstop BarclayHedge

By
John D'Antona Jr.
-

FAIRFIELD, IOWA — Hedge funds returned to the black in September, posting an industrywide monthly return of 0.32%, according to the Barclay Hedge Fund Index compiled by BarclayHedge, a division of Backstop Solutions. By comparison, the S&P Total Return Index was up 1.87% in September.

For the year-to-date through September, hedge funds returned 7.00%. Over the same period, the S&P Total Return Index gained 20.96%.

September’s gain was a welcome reprieve after a losing month in August (-0.96%). Sector performance was mixed, gainers outnumbered those in the red by a 5:3 margin. Emerging market funds – excluding Eastern Europe – were a factor in pushing the index into positive territory for the month.

“Many emerging market countries and Pacific Rim markets benefited in September from the U.S. Fed’s rate cut, while countries like Mexico and Vietnam enjoyed export increases to China as a result of the U.S.-China trade war,” said Sol Waksman, president of BarclayHedge. “On the other side of the coin, slowing growth in Germany and elsewhere in Western Europe contributed to slowdowns in Eastern European economies.”

Among sectors in the black in September, the Option Strategies Index led the way with a 2.74% return. Other leading gainers included the Pacific Rim Equities Index, which returned 2.15% in September, the Emerging Markets Latin American Equities Index rose 2.03%, and the Emerging Markets Asian Equities Index gained 1.32%.

Among the sectors with the largest monthly declines in September were the Technology Index, down 1.55%, the Healthcare & Biotechnology Index lost 1.42%, the European Equities Index dropped 1.15%, and the Equity Long/Short Index fell 0.88%.

While sector results were mixed for the month, all but two remained in the black year-to-date through the end of September. The year’s leaders include the Emerging Markets Eastern European Equities Index, which gained 14.38%, the Emerging Markets Latin American Equities Index rose 11.95%, the Technology Index returned 10.59%, and the Option Strategies Index advanced 10.39%.

Sectors in the red for the year-to-date were the Volatility Trading Index, down 2.20%, and the Equity Market Neutral Index, off 0.46%.

For a complete table of BarclayHedge Hedge Fund and Sub-Index results for September, as well as historical returns, click here.

About Backstop Solutions

Backstop’s mission is to help the institutional investment industry use time to its fullest potential. We develop technology to simplify and streamline otherwise time-consuming tasks and processes, enabling our clients to quickly and easily access, share, and manage the knowledge that’s critical to their day-to-day business success. Backstop provides its industry-leading cloud-based productivity suite to investment consultants, pensions, funds of funds, family offices, endowments, foundations, private equity, hedge funds and real estate investment firms.

BarclayHedge, a division of Backstop, currently maintains data on more than 7,100 hedge funds, funds of funds and CTAs. The BarclayHedge Indices are utilized by institutional investors, brokerage firms and private banks worldwide as performance benchmarks for the hedge fund and managed futures industries.

IDX Crypto Opportunity Index Down 55bps in September vs. -9.6% for GBTC.

By
John D'Antona Jr.
-

PHOENIX /PRNewswire/ — The IDX Crypto Opportunity Index (COIN), which seeks to provide opportunistic exposure to bitcoin by way of the Greyscale Trust (GBTC) was down 55bps (on a gross basis) in September compared to GBTC which lost over 9%.

The index is designed to dynamically allocate between GBTC and fixed income ETFs (via the IDX Tactical Fixed Income Index) and has been entirely allocated to the Tactical Fixed Income Index since 8/15/2019.

Ben McMillan, founding partner and CIO of IDX Insights said, “We believe that long-only exposure to bitcoin is not the most efficient option but investors have lacked a systematic manner in which to dynamically allocate to crypto-assets. Since launching on the SmartX platform on July 1st, 2019, we are pleased with how COIN has demonstrated its ability to provide efficient, risk-managed exposure to bitcoin. As crypto-assets continue to become institutionalized, we believe more investors will look for risk-conscious ways to gain exposure to this asset class particularly in a world of negative interest rates and elevated geo-political uncertainty.”

Evan Rapoport, founder and CEO of SMArtX Advisory Solutions said, “We have been seeing increased demand from Advisors who want to provide clients exposure to cryptocurrency but have been unable to do so due to the lack of custodial options and inherent volatility associated with the asset class. The IDX Crypto Opportunity Index can help to solve both of these issues. SMArtX was first to offer long/short strategies to advisors in a UMA structure and is proud to work with IDX to offer pioneering Crypto strategies to the advisor marketplace.”

About IDX Insights, LLC (www.idxinsights.com) 
IDX Insights is a research firm focused on developing innovative direct indexing solutions. Learn more about our unique Indexing as a Service (“IaaS”) at idxinsights.com/indexing-as-a-service-iaas. IDX Insights does not offer or provide investment advice or offer or sell any securities, commodities, or derivative instruments or products. The IDX Insights, LLC corporate name and all related logos are the exclusive intellectual property of IDX Insights, LLC.

About SMArtX Advisory Solutions (www.smartxadvisory.com)

SMArtX Advisory Solutions is the next generation turnkey asset management platform and the only platform to seamlessly offer traditional, alternative, and passive direct index strategies in a unified managed account structure. The firm also uses its proprietary trading and managed accounts technology to power SS&C Advent’s integrated unified managed account solution.

FINRA Publishes 2019 Report on Examination Findings and Observations

By
John D'Antona Jr.
-

WASHINGTON – FINRA published its 2019 Report on FINRA Examination Findings and Observations. The report reflects key findings and observations identified in recent examinations, and contains effective practices that could help firms improve their compliance and risk management programs. It summarizes findings and observations across a range of topics, including supervision, cybersecurity, best execution, segregation of client assets, and Uniform Transfers to Minors Act (UTMA) and Uniform Grants to Minors Act (UGMA) accounts.

This year’s report includes two material changes to increase its utility. One, it aims to more clearly delineate between material that is an examination finding, which describes a violation of a rule or regulation, and material that is an examination observation. The latter refers to a suggestion around how firms can improve controls to address perceived weaknesses that elevate risk, but does not typically rise to the level of a rule violation or cannot be tied to a specific rule. And two, this year’s report includes a new “Additional Resources” sub-section for most topics, with links to relevant additional information such as Regulatory Notices, topic pages and FAQs.

“Our position as a self-regulatory organization affords us the unique opportunity to provide firms with resources that help them more easily comply with rules and regulations and protect investors—and this report aims to do just that,” said FINRA Executive Vice President of Member Supervision Bari Havlik. “We hope firms find the Exam Findings and Observations Report useful in strengthening their own control environments and addressing potential deficiencies before their next exam.”

FINRA’s examination, surveillance, and risk monitoring programs play a central role in supporting FINRA’s mission of investor protection and market integrity, and a main component of those programs is FINRA’s examinations of broker-dealer firms. In addition to the individual reports firms receive following FINRA exams, firms have requested to learn more about what FINRA is seeing through its examination programs more broadly. In response – and as a result of FINRA360 – FINRA first published the Report on Examination Findings in December 2017.

The 2019 Report on FINRA Examination Findings adds to the collection of guidance FINRA has made available to firms on a variety of issues, and joins FINRA’s report cards as another resource firms can use to gauge their compliance controls against the rest of the industry’s. In addition, FINRA publishes an annual Risk Monitoring and Examination Priorities Letter to highlight issues of importance to FINRA’s regulatory programs.

About FINRA 
FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

FLASH FRIDAY: Bernstein’s New Frontiers

By
John D'Antona Jr.
-

The following article originally appeared in the October 2009 edition of Traders Magazine

As long as times keep changing, the idea of reinvention will always be in style. One has to adapt to stay competitive in a cutthroat world. This is true for pop stars, politicians and yes, even brokerages. The traders at 42-year-old Sanford C. Bernstein have grasped this. And as the securities industry has changed to remain competitive, so have they. 

For decades, Bernstein’s trading division shared the stage with its more famous sibling, investment research. And the trading desk profited from a relationship that directed customer order flow its way as payment for research’s prized services.

But the trading environment for that model has changed. And the desk decided several years ago that it wanted to pull its weight and become an attractive destination in its own right. So Bernstein, a unit of the institutional firm AllianceBernstein, has since been making an effort to transform itself by adding an arsenal of new services for clients.

For one, it began committing capital for client facilitation. It has also recently introduced a derivatives group. And it’s in the process of building a desk to trade in Asia. These latest moves follow in the wake of other substantial changes–augmenting its electronic services and adding sector traders–it’s made over the past five years to broadcast its commitment to trading in the U.S., according to Tom Wright, Bernstein’s global head of trading.

“It’s this large investment and focus within the firm to make sure that trading is a key element of the value-add proposition overall of the firm,” he said. “It’s clearly paid off; we have been consistent share-gainers each of the last several years.”

The changes are well timed. The evolution of the markets–and subsequent shrinking of commissions and institutions’ broker lists–have forced sellside firms large and small to alter their business models for research and execution. And they’ve had to do so in the nuclear winter of a financial crisis that last year leveled competitors and customers alike.

In last year’s annual report, AllianceBernstein painted a grim picture for the brokerage’s business environment: more low-touch trading, more buyside-handled orders, lower subsequent transaction fees, lower commissions, continuing pricing pressure for traditional brokerage services and less overall volume expected from a battered customer base. A recent Greenwich Associates study piled on when it declared that U.S. institutional brokerage equity trading commissions could drop by as much as 25 percent from 2009 to 2010. That would put institutional commissions at $10.5 billion, roughly on par with 2007.

CCA Storm Clouds

Back in 2007, the industry braced for the potential impact of client-commission arrangements, a payment mechanism for buyside firms whereby monies are held by brokers for eventual payment to the money managers’ research providers. Industry pros predicted that CCAs would ultimately consolidate equities trading into the hands of the bulge bracket and a few others. In turn, research would increasingly get paid through CCAs, and few would trade with the research houses’ trading desks.

But it hasn’t really worked out that way.

CCAs did hurt the smaller brokers, Wright said. For those further out on buyside broker lists, CCAs consolidated the execution side of the business. But Bernstein wasn’t among those numbers, he added.

“Were we concerned about CCAs back when they came out? Yes,” Wright said. “But that has passed, at least for us. If you consider where we are, they did not disenfranchise our trading business. Given our size and scale–and importantly, given the timing of the investments we made–we’re winning business based on our trading expertise, not just our research.”

The firm’s 10-K reported that revenues for Bernstein’s execution and research services in the U.S. and Europe rose almost 13 percent from 2006 to 2007, and 11.4 percent from 2007 to 2008. Over the two-year stretch, revenues jumped to about $472 million, from about $375 million–almost a 26 percent increase.

Bernstein’s European research and trading averaged about 22 percent of the firm’s overall revenues for the period between 2006 and 2008. The overseas electronic business has been the primary driver of revenue in Europe, Wright said.

AllianceBernstein, though, does not separate the brokerage’s execution revenues from those it earned from research. And while Wright would not disclose trading revenues, he did say that the volatility the crisis unleashed increased the high-touch volume the firm’s traders saw by north of 50 percent during the second half of 2008. And he likes what he sees going forward.

“We think we’re positioned extremely well,” he said. “We feel like this is a very good time for us. Clients are responding very favorably to our trading platform.”

Others agree. Jay Bennett, managing director at Greenwich Associates said that Bernstein research gets great ratings from its clients and a significant share of the broker vote. Their new execution services should bring them more customer interest.

“Their opportunity, clearly in some of the moves [under discussion], is to make sure that they provide all avenues in order to get paid for that vote,” Bennett said. “The institutional community likes to deal with them. They just need to make sure they can facilitate the trading side as much as clients would like them to.”

The Five-Year Plan

Bernstein brought in Wright from Merrill Lynch back in the summer of 2004 to place the firm’s trading operations under direct management and guide its strategic changes. Out of the gate, the firm bulked up its electronic trading services–particularly in single-stock algos and program trading. Bernstein then closed down its New York Stock Exchange floor operation in that period and upgraded its platform to an upstairs, sector-focused desk. It currently has 11 sector traders, Wright said. The firm also stepped up its investment in London for the European program trading business.

Bernstein later added product specialists–sometimes called sector specialists or specialist salespeople. Each is expected to know names and sectors, and to amass information from Bernstein research and from around the Street to benefit trading clients.

“Given our strength in research,” Wright said, “those are people who pull research intelligence to the point of execution and use that information to try to impact our trading desk clients.”

About a year ago, Bernstein began committing small amounts of capital to facilitate clients’ orders. The firm does not trade proprietarily, and so doesn’t take positions for internal gain. It still employs an all-natural model, Wright said.

“For our key client partners, it’s something we wanted to be able to offer to them to make it easier for them to choose us for an order, to trust us with an order,” Wright said. “We’re in a position now where we can facilitate someone; they don’t have to take the risk of calling us and then we can’t protect them if something prints.”

The program has gone well, he added. Facilitating for a handful of clients has helped marginally with Bernstein’s market share. And the firm expects the activity will increase over the next year or two.

On the product side, Bernstein in August expanded its derivatives effort in single-stock options, exchange-traded funds and cash-based index trading. The business started roughly 18 months ago with a two-person desk. In August, it hired five senior-level pros, Wright said.

“It was a very sensible way to grow the firm, and to be more relevant to our clients,” he added. “We’ll use derivatives expertise to make us better at our other core competencies; sales traders and sector traders get smarter about what’s happening in names. A lot of times, the activity in the underlying options can tell you a lot.”

The derivatives team will commit capital, as well. And, as with equities, the team will have a specialist responsible for disseminating research and “pulling the Bernstein research brand into the derivatives space,” Wright said.

This is nothing new. In the past year, or so, many firms around the Street have been opening derivatives desks to supplement their cash businesses. Bernstein said it will carve out its niche in the space by leveraging its sizable research product with its new derivatives desk.

“We’ve already seen significant growth,” he said. “It will be many times larger than it previously was for us.”

For its next trick, the firm is moving into Asia. It can execute global programs there already through a third party, Wright said. But Bernstein is still determining where it will locate. And it plans to fill out its strategy with both sales and trading soon.

“We’re mapping that out now,” Wright said. “But we expect to have research coverage, as well as sales and trading capability, in the major markets over the next six to 12 months.”

The process begins with research, Wright said. Sometime in 2010, sales and trading will follow in tandem. Salespeople will support the research product. Traders will focus initially on the global program trading business, and ultimately provide cash trading.

And expect more change to come. Between the past 12 months and the next 12 months, Bernstein has changed more than it has in the previous 30 years, Wright said. At the same time, he added, the firm is careful to maintain its core culture of research excellence as the brand.

Every firm is bound to have its share of fans, as well as detractors. But Bernstein customers have largely applauded the moves.

Traders Magazine talked to one head trader who said his portfolio managers are in love with the research at Bernstein. This desk head doesn’t use Bernstein for either capital-intensive trades or for derivatives, but he believes that its trading ability is in the same league as its research. “I really like the program trading desk,” he said, adding that he thought that Bernstein is probably on most buyside shops’ lists of top 10 brokers.

Another Bernstein customer with a strong research relationship said he thinks that the use of capital for client facilitation can work to the broker’s advantage. This trader doesn’t look for capital from Bernstein now, but said he would consider it in certain situations down the road.

“They can only do themselves a favor by committing capital to attract additional business,” he said. “I think it’s a good thing.”

One head trader at a firm that specializes in small-cap stocks likened Bernstein’s expansion to a “coming of age.” To be sure, she said, not all boutiques can take the next step to expand their services into new areas. Then, comparing the evolution of a brokerage firm to the development of a child, she continued: “If the bulge bracket is an adult and the boutiques are children, then firms like Bernstein are teenagers,” she said. “They’ve grown up.”

Traders: Managing Risk or Risking Jail

By
Jeff Martino and Ivory Bishop
-

As the trial against a former foreign exchange (FX) trader charged with price fixing kicked off in a Manhattan court last month, it is important to understand that criminal antitrust exposure has increased for traders at global banks dramatically over the past 10 years due to the expanding reach of U.S. antitrust law. Recently, the Department of Justice (DOJ) has scrutinized bankers dealing in major markets when their efforts to gather market color from other bankers seemingly spilled over into collusion. Their actions have not only embroiled them in Kafkaesque investigations, but even if a jury finds a trader not guilty or the DOJ investigation is closed with no action, regulators and private plaintiffs’ actions will persist for years and may result in billions of dollars in fines and civil settlements, debarment and suspension as asset managers, and reputational risk.

There are primarily two ways investigators have learned about potential collusion among traders: leniency applications and required self-reporting.

The DOJ Antitrust Division’s corporate leniency policy allows the first company to self-report a criminal antitrust violation and cooperate to secure a nonprosecution agreement, and potentially even have its key executives covered under that nonprosecution agreement. An executive may come forward and get the same protection if he or she is first in the door and beats the company in. Those who come in second, third or not at all risk prosecution and higher penalties the longer they wait. For some bankers, that has meant jail sentences. According to public statements by DOJ officials, applications for leniency under the Antitrust Division’s leniency policy are the reason for easily more than half of the hundreds of prosecutions secured by the Antitrust Division across numerous industries over the past decade.

Recent plea agreements and deferred prosecution agreements with global banks have required those banks to self-report to the DOJ potential antitrust and fraud violations by their traders. This does not bode well for traders at global banks because, in the DOJ’s view, these banks are now recidivists, resulting in the DOJ increasing resources for uncovering the full story even when traders are in a different market employed by a different subsidiary with different managers.  

What constitutes a violation? 

A criminal violation of the antitrust laws requires only that two or more competitors agree to influence a price. That is price fixing. Significantly, there is no requirement that a person intends to violate the law or that the result of the combined effort actually had an adverse effect on any potential victim. It’s a violation simply to make a joint effort to push a price in one or direction or another, the penalty for which can be up to 10 years in jail.

Implications for traders

The Antitrust Division has made it clear that due to the importance of the financial services industry to our nation’s economy and the global economy, it will continue to pursue even the toughest cases. That means we can expect more charges against bankers even where there is only a little better than a 50% chance that the government will win at trial.

An example of the Antitrust Division’s commitment to these prosecutions was the trial against three former FX traders charged with price fixing in 2018. The DOJ’s case was based on the testimony of a witness who participated in the alleged conspiracy and received a nonprosecution agreement in exchange for cooperation and testimony. The indictment alleged that the cooperator and three other traders at competing global banks agreed to influence the price of the euro-U.S. dollar currency pair through an agreement to help each other and refrain from trading against each other. Although the defendants were acquitted, each one lost their job and faced multiple regulatory actions.

Courts have ample experience assessing price fixing, and prior to the trial, the court stated, “[w]hatever may be its peculiar problems and characteristics, the Sherman Act, so far as price-fixing agreements are concerned, establishes one uniform rule applicable to all industries alike.” The court went on to state unequivocally that price-fixing allegations against competitors occupying the same level of the FX market structure is a criminal violation.

In late October, before Judge John G. Koeltl in a Manhattan federal court, the DOJ began the trial of Akshay Aiyer, a former JPMorgan trader, based on similar allegations of FX market collusion. Unlike in the first FX trial, Aiyer must face two of his alleged co-conspirators, who have already pleaded guilty to participating in the conspiracy with Aiyer and agreed to testify if needed. 

These two FX cases follow the significant Antitrust Division prosecutions of brokers and traders of the London Interbank Offered Rate (LIBOR). Beginning as far back as 2003, numerous brokers and traders conspired to manipulate LIBOR by submitting intentionally erroneous borrowing costs instead of submitting the rates the bank would actually pay to borrow money. The traders also colluded with members of other global banks to do the same, with the effect of influencing LIBOR in a way that would benefit the traders. Sixteen individuals were criminally charged. As with the FX defendants, many of the LIBOR defendants were not U.S. citizens, did not work for banks in the U.S. and did not trade in the U.S. Six banks, including their non-U.S. affiliates, were also convicted and had to pay more than $1.3 billion in criminal fines.

The risk for traders will persist. The case law to pursue traders in these markets has been refined, giving courts more experience and comfort to let these cases on the criminal side proceed in conjunction with the cross-border regulatory actions and growing civil class actions.

While the DOJ has faced scrutiny for not prosecuting bank CEOs, it has added a tool in pursuing market manipulation against market makers. The antitrust law in the U.S. covers various modes of conduct and those who manage traders must be aware of the risks. Measures can be taken to ensure communications between traders are monitored and trading is analyzed. Managing this risk is vital for bankers.

Best Execution in the US: Three Things Broker-Dealers Need to Think About

By
John D'Antona Jr.
-

As we head into 2020, US broker-dealers are preparing for new mandates on how they report transactions back to customers. The requirements – established by the Securities and Exchange Commission’s (SEC) updates to Rule 606 – aim to bring investors greater transparency and an assurance that orders are handled in line with the principles of best execution.

For background, the SEC delayed the implementation of these requirements several times, most recently in September. As of today, broker-dealers are looking towards staggered go-live dates of January 1 2020 for 606a and a simplified version of 606b3, and April 1 2020 for full 606b3 including look-through data, which leaves no time to waste in gathering data from downstream brokers, and more broadly, determining which methods of data collection will be used going forward.

To address the comprehensive implications of the updates to Rule 606, IHS Markit recently hosted an industry roundtable in New York, where we discussed best practices for meeting the SEC’s requirements.

Here are three key takeaways that broker-dealers need to think about:

1. Now is the time to have conversations with your downstream brokers and venues

It’s difficult to proceed without knowing the level of data and details downstream brokers and venues will be able to provide. By engaging with your counterparties, you’ll be able to discuss the depth of required look-through data and the means of facilitating it to interested parties. In order to stay compliant with 606(b)(3), brokers can only trade with execution service providers who are willing and able to provide downstream route data. It is likely that different execution service providers will have differing approaches to delivering look-through data because there is no SEC template for look-through, and there are some pros and cons to each approach.

Our discussion at the roundtable showed that most participants are still in the early stages of internal discussion regarding look-through data, and generally have not yet started the conversation with execution service providers. Across the board, there was concern about exposing sensitive information to counterparties, which many firms plan to mitigate through the use of vendor provided technology instead of home-grown solutions.

2. Start gathering the required look through data

Broker-dealers who use downstream brokers for execution services will have some challenges in acquiring and processing look-through data. There are two options for receiving data from downstream brokers: aggregated, or raw.

In practice, this will force firms to consider how implementation is going to work and weigh the various implications of potentially exposing investor identity, revealing routing logic intellectual property, and grappling with the inherent complexity of manipulating and reconciling large datasets.

3. Understand the two options to obtain and process downstream execution data

There are two basic formats of receiving data: aggregated data and raw data.

Option one is to receive aggregated data from downstream brokers, either aggregated by customer, month and venue, or by order number, venue and trade date.

  • The positives of aggregating by customer, month and venue are that the SEC’s XML format can be used, which downstream brokers usually support for their own reporting anyway, and that it represents the highest possible level of aggregation, therefore divulging the least amount of proprietary routing logic from the perspective of the downstream broker.
  • The negatives are that a customer ID must be supplied, potentially exposing sensitive client information to the downstream broker, and since the it is the highest level of aggregation, it is also the most challenging to reconcile between reporting and downstream brokers.
  • The positives of aggregating by order number, venue and trade date are that the downstream broker’s routing logic is still somewhat protected, and at the same time the investor’s identity is also protected.
  • The negatives are that special logic must be created by both the downstream broker and the reporting broker, or vendor, to fully process the data, and to a certain extent reconciliation may be challenging at times – as it always is when working off of aggregated records (though less difficult than when aggregated by customer, month and venue).

Option two is to receive raw data, either provided by a broker or given through an intermediary aggregator.

  • The positives of receiving raw data directly from the broker are that no special logic needs to be created by the downstream broker, and very little additional logic is required by the reporting broker (or its vendor). It allows for full reconciliation and can later be used for full scale performance and venue analysis.
  • The negatives are that it increases data processing volume for the reporting broker and potentially exposes the downstream broker’s proprietary routing logic.

Based on these takeaways, it’s clear that the revised data requirements for Rule 606 are substantial – without delay, broker-dealers need to evaluate their capacity for managing this in-house or through an external provider. While the SEC’s delay provides some temporary relief, 2020 is just around the corner, and the New Year will be here in the blink of an eye.

John Jannes is Executive Director of Trading Analytics at IHS Markit

Message to Merging Corporations – Cultures Matter

By
John D'Antona Jr.
-

Poorly matched cultures can sink even the most promising merger or acquisition if they’re not joined effectively. Poor cultural integration reduces morale, hurts productivity, pushes out talent and saps profitability.

Fusing two cultures effectively is a delicate and difficult undertaking, with too much at stake to be carried out incorrectly or approached haphazardly. To successfully blend two cultures during a merger or acquisition, organizations need to build a cultural integration plan pre-merger, with senior leadership buying into the process wholeheartedly and seeing it through to fruition.

Recognize the importance of your company’s culture

For this to happen, corporations must first recognize the central role culture plays, and the significance culture assessment holds during the due diligence and integration stages of the merger or acquisition process. This is often where trouble starts.

A global study by Aon Hewitt showed that nearly half of 123 organizations ranked culture assessment and integration in their top three priorities in due diligence process, with 30 percent placing them in the top two priorities. However, during the integration stage, only 24 percent rated cultural integration in the top two priorities.

Put more bluntly, a McKinsey article stated that 95 percent of executives agreed that post-merger integration only succeeds if both cultures fit, while just one quarter attributed integration failure to poorly matched cultures. Too few executives appear to understand the role culture plays during the integration process.

Keep it tight. No, keep it loose.

McKinsey said an organization’s culture should aggregate its vision, the values that guide employee behavior and the management practices, norms and attitudes that characterize how work gets done.

As visions, values and management practices vary among companies, successfully joining any two cultures together often entails avoiding clashes and bridging fault lines. The biggest tensions between two companies often stem from a clash in “tight” and “loose” cultures, according to a Harvard Business Review (HBR) article.

A tight company culture prizes predictability, routine, organizational efficiency and consistency; they maintain cultural traditions through rigid rules and processes. By comparison, fluid and creative loose cultures mostly shun rules and encourage new ideas. The stark differences in these cultures often erupt when they’re joined in mergers or acquisitions.

HBR studied the matter more closely, aggregating numbers on more than 4,500 international mergers from 32 different countries between 1989 and 2013. On average, they found that companies battling divides between tight and loose cultures saw their return on assets fall by 0.6 percent three years after the merger, or $200 million in net income per year. For more pronounced mismatches, the decline grew to $600 million.

McKinsey noted, corporations with more aligned cultures and stronger organizational health generate on average three times the shareholder returns of companies that lack these features.

Leadership must take the lead

To succeed with cultural integration post-acquisition or merger, senior leadership should take a number of steps when designing a cultural integration plan. An important but frequently missed first step is to appoint someone to lead cultural integration on behalf of the senior leadership team with direct access to the CEO to ensure culture stays on leadership’s agenda. Without this, senior leadership often find themselves ill-equipped to navigate the integration process and are more at risk to endure cultural clashes.

While there’s no single approach to constructing a cultural integration plan for a merger or acquisition, these general tips and guidelines should be considered:

Due Diligence and Culture Audit

  • Include culture as part of the due diligence process to gain a good understanding of it pre-acquisition or merger
  • Determine, before agreeing on the future culture, how wide the current gap is between the existing cultures of both parties; some ways to achieve this are:
    • conduct culture interviews with management and staff
    • run employee surveys to provide an anonymous culture temperature check
    • use employee focus groups to identify differing perceptions of each organization

Setting the Direction and Cultural Agenda

  • The CEO sets the vision for the newly merged or acquired company and the values that flow from it. This is crucial, as it provides direction and a sense of purpose
  • Set the cultural agenda, understanding that the combined future culture will require time, consideration and the commitment of all senior leaders and Merger and Acquisition stakeholders
  • Understand that the process of selecting the new senior management teams sends a strong message to employees around future culture and expected behaviors
  • Lock in key talent early in the process

Teaching Desired Behaviors

  • Identify the desired behaviors and expectations that align with the expected values around leadership styles, how work gets done, decision making, innovation, governance and employees
  • Host workshops or team-building sessions for the most senior to the most junior level staff to communicate and provide training on these behaviors and expectations
  • Design Human Resources programs and practices to further ingrain these behaviors and expectations

Enroll and Empower Leaders at All Levels

  • Empower middle management to assist cultural change as employees tend to follow their immediate manager’s example, even when that behavior is at odds with policy or procedure
  • Inform and equip leaders with the required resources to actively implement a successful cultural integration
  • Enroll leadership from both organizations to model behaviors, drive change and address any developing power conflicts, uprisings or turnover rapidly

Overarching Messages as You Progress

  • Complete the assessment phase in a timely manner, then enact planned changes to organization structure
  • Manage employee engagement proactively using a communication plan that monitors and measures results continuously
  • Communicate progress and the importance of the process regularly to all employees and additional stakeholders; listen to and address their concerns

Understand that even the best conceived cultural integration plan can fall apart once the deal is signed, as priorities change and day-to-day business demands take priority. Many leaders do not fully grasp the importance of cultural integration and the compounding effects of its failure until it’s too late.

It can take several years for mindsets and behaviors across organizations to adapt to changes in culture. However those shifts can only happen if companies plan accordingly, which means prioritizing culture in the due diligence, planning and transformation stages. Developing the right approach to integrating cultures beforehand can be the difference between a merger or acquisition that brings out the strengths of both companies and one that leaves the combined company weakened and struggling to find its direction.

Veronica van der Hoeven is Managing Director of People Strategy at MUFG Investor Services 

1...580581582...2,179Page 581 of 2,179

MOST READ

✕

SUBSCRIBE FOR TRADERS MAGAZINE EMAIL UPDATES

[activecampaign form=12]