Gregory Corrigan has been selected to take up the reins for US equity and FX trading after eight years at LGIM.

Corrigan joined LGIM in 2016 as a trader in equity and FX trading, receiving a promotion to senior trader in 2019.

Previously in his career he spent a year and a half at Fideuram Asset Management Ireland as a trader in equity and derivatives and spent nearly three years at ING Eurasia ZAO in money markets roles.

“I’m happy to share that I’ve started a new position as head of US equity and FX trading at Legal & General Investment Management (LGIM),” Corrigan said in an update on social media.

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The initiative saw major banks including Goldman Sachs, JP Morgan, BNP Paribas, BNY Mellon, Deutsche Bank, Barclays and Northern Trust all set up shop in the region.

“One of the key reasons Singapore is an attractive market is it’s pretty well positioned, as it shares the same time zone as Hong Kong,” Gerard Walsh, global head of capital markets client solutions at Northern Trust, told The TRADE.

“There’s already a huge section of the asset management community and the asset servicing community, including Northern Trust, that are established in Singapore as large parts of their global operations.”

Competition

Although Singapore continues to present itself as an attractive market and a potential new major trading hub, competition exists within the region for international engagement.

Hong Kong continues to be very active, with its authorities keen to maintain their hold on the financial services sector. More recently, the UAE also begun to compete within this segment – which wasn’t necessarily the case even five years ago. The UAE also presents time zone benefits – in terms of its closeness to Europe and the UK – for firms which would previously have looked to somewhere like Hong Kong or Singapore to establish an international presence.

“We’ve seen a lot of activity with hedge funds and asset managers establishing themselves in Dubai or Abu Dhabi,” noted Walsh.

“There’s a little bit of regulatory and competitive arbitrage going on in terms of offering up Singapore as a sensible place to base yourself. You’re also seeing the regulators and the industry itself in Singapore react to those by looking for opportunities to attract more and more firms.”

This year, the industry has seen interest in Singapore grow from the buy-side too. Most recently, Legal & General Investment Management (LGIM) expanded its footprint across Asia with the opening of its new Singapore office; the latest development in the firm’s growth strategy for the region.

“Due to the City-State’s regional influence and connectivity worldwide, opening an office in Singapore was an important milestone in LGIM’s international growth strategy,” a LGIM spokesperson told The TRADE.  “We consider Singapore one of our most significant investment centres, both in Asia and internationally. It has developed the infrastructure and a stable regulatory and business environment that support accessing South East Asia markets and beyond.”

Elsewhere, interdealer broker TP ICAP also took advantage of the MAS’s initiative to boost the region as a major trading hub. Early last year, TP ICAP revealed plans to launch a foreign exchange electronic trading platform into the region using its Fusion interface.

“With Fusion FX, we are migrating TP ICAP’s various FX products and brands onto platform; it therefore makes strategic sense to launch it in Singapore, given its standing as the third largest FX trading centre globally and the largest in Asia,” Phillip Currie, managing director, e-Solutions at TP ICAP told The TRADE at the time of announcement.

Last year, the London Stock Exchange Group (LSEG) revealed plans to launch a fully-cleared non-deliverable forwards (NDF) matching venue in Singapore, addressing strong demand seen in the region.

Supported by the Monetary Authority of Singapore (MAS), as with the aforementioned FX pricing and trading engines, the roll-out represented the first phase of LSEG’s plans to implement NDF and Spot Matching and streaming relationship venues in Asia.   

Positioning the service is Singapore is designed to minimise trading latencies in Asia, with NDF Matching helping push the market towards increased electronification and to offer clearing as a choice at execution, benefiting all participants.

Cross-border exemption framework

As part of its ongoing push, the MAS has also introduced the cross-border exemption framework which has been a key step forward in positioning Singapore as a major trading hub.

The framework allows firms to market their products and services in ways that were previously prohibited unless you had a physical presence and a physical license to do that specific set of activities.

“This enables firms to come in with relationship and business development people to determine whether Singapore is the right place to establish themselves,” added Walsh.

“Singapore offers obvious benefits of getting established in Asia Pacific, putting down a small footprint, and then in a in a relatively low-impact way, hubbing to all of the other places that you might need to visit in the region.”

With a continuous push for attractiveness through various initiatives from the MAS, as well as Singapore’s cross-border exemption framework, it is expected that Singapore will continue to grow as a potential major trading hub over the next few years. With engagement from both the buy- and sell-side, it’s clear that it’s worth keeping our eyes on the region.

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LGIM has had a presence in Asia for over 10 years, having opened offices in Hong Kong in 2021 and Tokyo in 2017. The new Singapore office will help expand LGIM’s coverage for both existing and prospective clients with the region.

The business is led by Natasha Mora, managing director, Asia ex-Japan, who previously served in senior positions across L&G Group and LGIM since joining the firm in 2006.

In addition, LGIM has expanded its distribution team following increased demand for the firm’s investment solutions.

Gerald Koh has been appointed head of wholesale Asia (ex-Japan), reporting to Mora – a role he had held since 1 August.

As part of the role, Koh leads the development of LGIM’s wholesale business across Asia and holds responsibility for client acquisition and support across private banks, wealth managers and other intermediaries.

Elsewhere, Heston Goh joined the firm as sales director, South East Asia institutions, on 1 September – increasing the depth of the firm’s coverage of institutional asset owners in the region. He reports to Jack Loi, head of institutional sales for Asia ex-Japan.

The new Singapore office also houses LGIM’s newly established Asia ex-Japan investment stewardship team, which will cover the firm’s investment engagement activities and ESG priorities across the region. The team is led by Trist Chen, who previously served at global sustainability consultancy firm, ERM.

“While we have been servicing institutional clients in the Asia Pacific region for over a decade, our new office in Singapore will add depth, business capability, investment expertise and brand profile in Asia, complementing our existing presence in Hong Kong and Tokyo,” said Michelle Scrimgeour, chief executive of LGIM.

“Due to the city-state’s regional influence and connectivity worldwide, opening an office in Singapore is an important milestone in our international growth strategy. This new local office affirms our commitment to the region, allows us to pursue new business opportunities and will elevate our ESG advocacy across Asia.”

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Ed Wicks, global head of trading, Legal & General Investment Management

Mike Carrodus, CEO, Substantive Research: In 2023, tipping points will be hit across investment research and data. The recently announced Bernstein/SG deal indicates the direction of travel in research, where even premium research products and services become part of wider platforms with multiple revenue streams. Mifid II arguably removed a great deal of “nice to have” research from the market, but the danger now is the loss of quality and differentiated inputs at greater pace.

If providers choose to survive by being acquired, then research consumers need to understand what this M&A means for quality and independence. In market data we will see the opposite situation – continued cost inflation at a provider and product level, and a group of consuming firms struggling to control budgets and understand how their agreements compare to the wider market. The FCA’s Wholesale Market Data Study will finish by the end of the year, with the accompanying focus on the competitive landscape and the opacity of pricing and licensing models. Buy- and sell-side firms will also take it upon themselves to understand their data consumption more holistically and make concerted efforts to encourage greater competition and transparency wherever possible, regardless of how the regulatory situation plays out. 

Matt Barrett, CEO at Adaptive Financial Consulting: Firstly, there will be increased investment in technology across financial services and capital markets participants. In response to the opportunities created by the big tech firms stumbles, depressed valuations, and lay-offs, the use of technology to differentiate will be back as a board room topic in 2023. Secondly, cloud resilience will be high on the agenda. With financial institutions accelerating cloud adoption, rapidly moving their core infrastructure onto the cloud to save cost, enhance their ability to scale and improve access to data insights and analytics, an issue that will become increasingly top-of-mind is vulnerability to outages. As firms rely on cloud services, faults or drops in service can have a critical impact on businesses and traders that use them. Cloud resilience and high availability will therefore become a crucial topic – sophisticated trading firms need the assurance that their operations will remain consistent 24/7. Firms realise they cannot be beholden to third party outages – fault tolerant architecture and technologies will therefore become an increasingly central consideration for firms looking to build their own trading technology stack to differentiate.  

Paul Humphrey, CEO, BMLL Technologies: The race for high-quality historical data will step up in 2023 as firms look for deeper insight across the trade lifecycle. Now firms must capture the power of granular historical data to gain an edge and are more aware of what capabilities they need to implement at every stage to achieve this. Quant teams are using third party data science platforms as the foundation upon which to build research. Traders are demanding analytics that contextualise real-time activity against historical averages. Sophisticated firms are combining public and private cloud to maximise the benefit of high-quality data within their own environments at a fraction of the cost of running complex market data pipelines themselves.

All of this is predicated on high-quality data from firms who specialise in historical data, not simply as a by-product of their real-time business but built using dedicated Level 3 engineering processes as the core value proposition they bring to the market. Demand for market data derived from the most granular data available will only grow as the need for competitive edge, and correlating sophistication levels, rise. Firms that realise the predictive power of Level 3 data will understand their markets better, derive more predictive analytics, and leave those still using lower-quality data behind. 

The post The TRADE predictions series 2023: Data, part one appeared first on The TRADE.

Legal & General Investment Management (LGIM) has partnered with Saphyre to utilise its AI platform for the onboarding and maintenance of its funds. 

The platform is capable of tracking compliance-related activities, such as NAV terminations, contained within the respective ISDA and GMRA agreements, automating client checks for trading as a by-product of legal agreement setups and amendments. As a result, the platform reduces risk and inefficiencies by removing manual tasks for both buy- and sell-sides.  

Stephen Roche, president and co-founder at Saphyre said: “It’s exciting to officially announce that LGIM is part of the Saphyre platform. We’ve been collaborating with them since the beginning, in fact, when Gabino and I started this company. LGIM’s clients and counterparties will benefit from the advantages that Saphyre’s platform offers.” 

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Brussel’s changes to MiFID II as part of its Capital Markets Union (CMU) review in November reaffirmed Europe’s stance on dark trading. Since the implementation of MiFID II in 2018, the continent has made it clear that it intends to hold transparency above all else in a bid to foster protection for retail investors in the capital markets, a crusade that would have included the UK, had it not been for Brexit.

However, following the UK’s departure from the European Union, the two parties have had opposing priorities. While the EU has been focused on continuing to curb the growing amount of volumes taking place off-book, the UK has been intent on reinventing itself to make it a more attractive place to do business following the loss of almost all its EU share trading business back to the continent.

“The balkanisation of liquidity story is definitely playing out now. I think that some of the market practitioners were hoping – naively or otherwise – that there wouldn’t be so much divergence so quickly, but I think now that ship has sailed and we’re definitely seeing that happen,” said James Baugh, head of European market structure at Cowen. “It’s [Europe’s MiFID II changes] all part of that narrative to try to curtail the amount of business transacted on MTF darks, as well as, continuing to apply pressure on systematic internalisers to try and push more of that business to lit.”

The key objective of MiFID II was to move volumes back onto lit markets, introducing things like the double volume caps (DVCs) for dark trading to do so. However, much of this liquidity has since resurfaced on alternative trading mechanisms with limited pre-trade transparency, including systematic internalisers (SIs) and frequent batch auctions (FBAs) which Europe has now set its sights on with its latest tweaks to the rulebook alongside additional limits to dark trading.

“Most of us predicted divergence between the UK and EU 27. MiFID II is all about getting liquidity back into the lit transparent environment. Whereas, on the UK side because of Brexit we’re seeing a different political move, which is how do we liberate the UK in such a way to attract business to it? That’s a very different problem to solve,” said Alasdair Haynes, chief executive officer of Aquis Exchange.

Successful lobbying from incumbent regulated markets has meant Europe has continued to favour transparent lit markets in its regulatory updates and if the UK’s stance diverges from this too dramatically in the coming months, then market participants could be left with a fragmented liquidity landscape and subsequent increased cost of trading to navigate. 

“These proposals have the potential to alter how people think about executing their order flow in the UK and Europe. I think most market participants would agree that there’s a case to be made for more simplicity in market regulations and I think divergence doesn’t help that aspiration,” said Ed Wicks, head of trading at Legal & General Investment Management. 

Into the light

Among the changes implemented by the European Commission is the replacement of double volume caps (DVCs) with a single volume cap (SVC) of 7% across Europe in a bid to further reduce the amount of dark trading on the continent. This system replaced an 8% cap on participants and 4% cap on venues, which most agree was overly complex. 

More specifically, the recent changes made by Brussels seem to be intent on driving small trade volumes back onto lit markets and are focused predominantly on anything below Large in Scale (LiS). According to data by Liquidnet’s Liquidity Landscape, the implementation of MiFID II at the beginning of 2018 saw the proportion of the dark market traded above LiS in Europe, the Middle East and Africa (EMEA) double from 20% to 40%. Regulators in Europe are now looking to make that percentage higher still.

Among its methods for doing so is the prohibition of alternative trading venues (MTFs) from using the reference price waiver to execute small trades in Europe, due to a new minimum threshold of two times standard market size. The changes are not the worst-case scenario for MTFs and dark trading in Europe, with many speculating that regulators intended to remove LiS thresholds for dark trading altogether. Whether this is something that is reconsidered later down the line will have to be seen.

“Studies show that there is quite a lot of volume below that threshold that does currently occur on SIs and dark venues. If the proposals were to go forward in their current form, some of that flow could be encouraged onto lit markets. Large orders, they [Europe] can clearly see a rationale for dark trading,” adds Wicks.

Regulators are seemingly aware that historically when they have squeezed dark trading, alternative venues such as systematic internalisers (SIs) and frequent batch auctions (FBAs) have seen an increase in volumes and it is these quasi-dark corners of the market that they are subsequently shining a light into, both through their recent update to MiFID II and their potential future regulatory updates that could follow the RTS 1 and 2 consultations. 

“Europe is trying to carry on that transparency process in more areas where they didn’t go as far as they needed to,” said Gareth Exton, head of execution and quantitative services for EMEA at Liquidnet. “It’s now these other things that have come up because of MiFID II, which is the FBAs and the SIs, which they now want to have a have a go at. It’s trying to now shine a bit more of a light onto what’s happening pre-trade.”

Systematic internalisers

Systematic internaliser volumes have on occasion been inflated in Europe by regulators. In June 2021, ESMA published a set of data claiming that on-venue equities trading was in steady decline with SIs labelled one of the main culprits. The report followed data in November 2019, that had found that the Goldman Sachs SI had dominated European equity trading that year, however, this conclusion was later deemed to have been generated with an incorrect data set. The number was inflated by clearing trades, due to the size of the investment bank’s prime brokerage business. The regulator was consequently called out by various industry associations, including Oxera and AFME, for its inaccurate perception of the marketplace. According to Liquidnet, systematic internalisers in the third quarter of this year made up 13% of the overall trading volume in Europe.

In its recent changes to MiFID II, several changes were recommended by the Commission to curb SIs, including upping the minimum quote size to two times standard market size (SMS) and limiting their ability to match at mid-point to when they are trading above twice the standard market size, but below the LiS threshold, while complying with the tick size as well as above LIS. It should be noted, the two times SMS is just a quote size and SIs can trade below that. Regulators have also suggested prohibiting payment for order flow for SIs, instead requiring them to earn retail flow by publishing competitive pre-trade quotes in another move to force smaller trades back into the regulated markets. The Street is mixed in its approach to the changes to the SI regime, with many buy-side firms seeing the benefit of liquidity provided by the mechanisms, particularly when it comes to small orders.

“If you think about in order that you may be trading on a scheduled basis over a period of time, you’re naturally going to have that parent order broken into smaller chunks and for some of those you would still want to benefit from some of the features that potentially SI liquidity can give you,” adds Wicks. 

FBA Transparency

Proposed changes to FBA pre-trade transparency as part of the RTS 1 and 2 consultations – the results of which are still being deliberated – are even less welcome than the changes to SIs. The mechanisms were first introduced into the market as a method for participants to skirt the DVCs originally implemented as part of MiFID II in 2018. If a stock was capped, it could be traded in the lit market with a reference price. They rely on limited transparency pre-trade to function properly due to the inherent speed bumps within them.

RTS 1 and 2 have set out proposals to make these auctions more transparent. However, many have argued that the level suggested by European authorities could expose them to information leakage, which could ultimately leave participants subject to arbitrage strategies in the continuous trading market. ESMA has set out two potential new definitions for FBA transparency, with its preferred option allowing for the publication of individual orders prior to a match being identified. This is contentious as orders published in auctions must sit and wait for the auction to uncross for 100 milliseconds while the continuous trading market could act upon them.  

“FBAs – which share the same pre-trade transparency model and price-forming algorithms of Closing Auctions – create a level playing field and deliver huge benefits to institutional investors ill-equipped to execute in low-latency environments. It is abundantly clear that ESMA’s proposals to introduce additional pre-trade transparency will in fact entirely destroy the usefulness to investors of EU-based FBAs,” says Nick Dutton, chief regulatory officer at Cboe Europe. “Given that the current transparency regime for these venues had already been reviewed by ESMA and deemed appropriate, we hope ESMA will conclude that its more recent suggestions should not be taken forward. Decisions to restrict venue choice within the EU, to the detriment of investors, should only be taken on evidence of a clear conflict between serving investors’ needs and maintaining efficient price formation, and we strongly believe no such evidence exists.”

A liberal UK 

With regards to market transparency and dark trading, the UK has taken a contradictory stance to Europe following the end of the Brexit transition period at the end of 2020, largely to foster new interest in its markets. On the 4 January 2021, as the markets opened following the 31 December deadline, north of 95% of European share trading volumes had migrated to the EU from the UK, totalling around

¤6 billion of daily trading volume. Following this loss, it was rightly predicted that the UK would try to lure some of these volumes back to its shores by liberalising areas where the EU is becoming more stringent. 

The UK is yet to make any concrete changes to its regulatory framework, however, in its Wholesale Markets Review (WMR) HM Treasury has put out feelers to the industry asking for suggestions on current market structure, with dark trading being one topic at the forefront of discussion. “It feels to me that the European perspective is seemingly more prescriptive in how they think about dark trading whereas the UK seems to be slightly more market led,” says Wicks.

Across the various areas in which the EU appears to be clamping down, the UK has taken a relaxed and liberalised approach, for example, scrapping DVCs all together. In the WMR it cites the US market as an example that has no such cap and yet whose dark trading volumes have plateaued at 10%. Elsewhere, it is proposing to make no changes to the current periodic auction regime and has also proposed to allow SIs to execute client orders at the mid-point within the best bid and offer for trades below LiS, provided the executed price is within the SIs’ quoted prices and the execution is in a size no larger than that which is quoted. Under the WMR’s proposals, reference price systems will also be able to match orders at the mid-point within the current bid and offer of any UK or non-UK trading venue that offers the best bid or offer.

Be careful what you wish for 

While the UK may begin to attract more business by liberalising, some have warned that regulators in the UK must be careful what they wish for. These individuals argue that if too much trading takes place in the dark, it could lead to a degradation of the reference price in the lit market, which in turn could damage midpoint trading and prevent end investors from achieving best execution. Data by big xyt found that market share on price referencing as opposed to price forming mechanisms in the UK, including dark venues, FBAs and SIs, has grown from 12% in the first quarter of 2018 to 21% in the fourth quarter of this year. This number can only be expected to rise if regulatory changes make the UK a more attractive place for volumes driven out of the EU. 

“If the UK liberalises so much that price discovery becomes meaningless and we end up in a marketplace that looks more like the foreign exchange market rather than the equity market,” says Haynes, “It could be creating a problem that shifts more business back to Europe. So, this is going to be incredibly interesting to watch for the next year as errors could be made on both sides with pretty dramatic outcomes for the industry as a whole.”

The UK’s WMR – citing an FCA paper from 2017 – states that a damaging level of dark trading could range from about 11%–17% and therefore the text of the proposals maintains that the level of dark trading in the UK will continue to be monitored and reserves the right for UK authorities to retain the ultimate sanction to limit dark trading should it become unmanageable. “They will retain that handbrake,  if you like, so I think there is an acknowledgement that there may be a threshold that if crossed becomes harmful to price formation or to effective market operation,” adds Wicks.

The number of capped out stocks in the EU has remained consistently low, so many argue that this level of dark trading is difficult to reach with or without a cap. The EU also set out plans to implement a single consolidated tape for each asset class in its MiFID II amendments also going some way to alleviating concerns about an inaccurate reference price caused by too much dark trading.

Fragmented markets

These diverging approaches to different market mechanisms and venues on either side of the channel following Brexit means in the not too distant future market participants could be forced to navigate a fragmented liquidity landscape, which in turn will bring several other hurdles to overcome, including increased costs of trading and a less inclusive trading environment. 

While dark trading, systematic internaliser, and FBA volumes in Europe have not increased astronomically, they have grown. From the first quarter of 2018, addressable market share excluding prints above LiS and outside of market hours across these three areas in German blue chip stocks grew from 8% to 15% in the fourth quarter of this year, according to data published by  big xyt.

If the UK makes itself the more attractive place for these volumes to trade then a portion of them could be forced out of the EU and back onto UK venues, much to the dismay of the pan-European trading venues who set up European branches in a bid to accommodate the shift of EU share trading post-Brexit. Said venues with dark books would be the short-term winners, however, ultimately fragmentation will lead to higher costs for everyone. Worse still this liquidity could be pushed out into third countries meaning it’s a lose-lose for both the UK and Europe.

“I never believed that business could ever come back to the United Kingdom, but this is an extraordinary football match because in some ways it looks like the European Union could also be making a spectacular own goal of themselves if they are too stringent against the liberalised market,” says Haynes. “What happens is some of the liquidity is shipped back to London and a large liquidity pool is divided and everybody loses, everybody’s a loser there because spreads will widen and markets become less liquid. It is better to have 100% of a particular market in a single place because that is where you get most liquidity.”

What’s more, with EU investors limited to where they can trade by the share trading obligation (STO) – also scrapped by the UK – diverged and fragmented markets also have the potential to exclude a large portion of these investors from certain pools of liquidity. Around 80% of institutional order flow in Europe is international, meaning they’re not bound by Europe’s STO and could take the party elsewhere. 

“Suddenly you may have an EU asset manager unable to access the liquidity that’s taking place on EU venues between other global asset managers and it all starts to get very tricky,” adds Exton. “Then you get the potential of Europe reacting to that and the creation of ‘fortress Europe’.”

Increased trading costs 

A fragmented liquidity landscape presents several issues around the cost of trading, forcing participants and venues to set up dual operations, all of which are additive costs that eventually trickle down into the market. Code bases for algorithms become more complicated and complexity is added to offering different services for different securities in different jurisdictions. 

“When you think about trading larger size block business clearly the reason why the market has alternatives is to facilitate that type of workflow so as not to negatively impact the underlying price of a given stock,” says Baugh. “It could become more expensive to trade in Europe because the implicit costs of trading go up on the basis that there are less choices available, particularly to institutional investors. Too much fragmentation will also certainly lead to an increase in direct costs from stitching these different liquidity pools back together, but also just in terms of the implicit costs of trading for the end investor themselves.”

With the re-introduction of certain EU securities expected to follow regulatory divergence, the cost of trading in London is also expected to go up. According to statistics from Cowen, for the first six months following the re-introduction of Swiss securities into London in February, the implicit cost of trading rose by around half a basis point, and this number was increased further for smaller trades. “One might say this is the cost of competition – facilitating certain time sensitive arbitrage strategies, which tend to trade in smaller sizes – a pattern we’ve seen in other competing markets,” Baugh adds.

The future

As it stands the ball is now in the UK’s court. With the results of its Wholesale Markets Review due to come into play early next year it must decide how extensive its liberalisation will be following the recent MiFID II changes proposed by Europe. If too liberal, it could spark a shift in liquidity that fragments the markets once again, just a year after the dust has settled post-Brexit. Regulators on either side of the channel are pulling in opposing directions and this brings with it the likelihood that participants in the not too distant future will be executing in a divergent and fragmented world. Hold on to your hats.

“You’ve now got two almost diametrically opposed views of liberalisation on one side of the channel and trying to create a more effective price discovery mechanism on the other. The irony of it is that we probably should aim for something in between, but because of the various politics that’s going on we’re seeing this massive divergence taking place,” concludes Haynes. 

“Unfortunately, the structure of the market is such that there is no such thing as a lit market that is perfect today and as a result we brought in dark trading to find other mechanisms to be able to allow people to trade in size without moving price. You need to change the lit books to make them more effective, make them more liquid and get more people to trade in the lit environment so that you get the right prices.”

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How has Legal & General Investment Management (LGIM) adapted itself to remote trading and do you expect to implement a working from home hybrid form of desk? 

We coped very well throughout 2020. If I look back on the full year across all asset classes, we were able to support an increase in volume across our global trading desks of 20%. The ability to support that level of growth of activity with remote working conditions was a real testament to the strength of the processes we put in place. 

It is pretty clear that some level of flexibility for our traders will remain. We are currently going through the process of surveying our staff and trying to build a picture of how they want to work in the future. Once we have collected that information we will make a plan of action. We have proven that we can trade safely, efficiently and effectively from home. There are different jobs on trading desks. For example, at LGIM the team comprises both traders and quantitative analysts, and clearly the role will to some extent dictate how flexible the working pattern might be. 

One of the things we are looking at is how we continue to fit out our offices with the appropriate technology, it sounds obvious, but you can’t go into a meeting room if you’ve got half of the staff working remotely and half working in the office. You need to have appropriate technology and AV equipment in place to make that experience as seamless as possible. 

What new technologies do you expect could disrupt institutional equities trading in the next few years? 

Improvements are long overdue in the initial public offering (IPO) and secondary workflows. This topic is gaining traction on the buy-side at the moment and I’m confident in the next few years we will have better solutions in place to enable us to have a much more STP environment for new issues across both equities and bonds. 

The area is ripe for further development and any technology in that space would be welcomed by the buy-side. My own trading desk, and also those of my peers at other large buy-side firms, are managing more automated workflows through order management systems (OMS) and execution management systems (EMS), and subsequently more analytics and advanced data sets will be required for enhanced decision support and for monitoring purposes.

What market structure changes have most impacted trader workflows in the past year? 

Changes to trading obligations that came into force post-Brexit at the beginning of this year were significant. Both the share trading obligation and the derivatives trading obligation. The derivative trading obligation had a meaningful impact on trading workflows, even taking into account the FCA’s use of temporary transitional power. 

You could say quite logically that the bigger changes to market structure are actually ahead of us. We have heard recently the initial proposals from the Chancellor in the UK on the removal of the share trading obligation, and we are looking forward to the upcoming consultations over the summer. The more interesting changes are on the horizon. 

Do automation and better execution performance always go hand in hand on the buy-side trading desk? 

It depends on what you are automating and why are you are automating it. From my experience, the automated workflows that we support at LGIM are aimed at improving both efficiency, as well as, trading outcomes. We support various automated workflows across rates, FX and equities. 

One thing that often gets lost, perhaps, because it is not so interesting, but nonetheless is an important point to make, is automating post-trade activities. This is also a viable activity for trading desks to engage in, booking out executions and partial executions at the end of the day for example can be really time-consuming and inefficient if done manually. 

Where do you see the future of outsourced trading? 

With any outsourced arrangements, firms need to assess both the scale and complexity of their business in order to determine whether it is appropriate for them. The global trading function at LGIM is a fundamental part of the investment process. Our traders play a key role in the investment performance of the firm. We have desks in Hong Kong, London and Chicago and we execute millions of orders on an annual basis across all asset classes. 

We believe that that scale brings a huge number of benefits to our firm and naturally therefore to our clients. If you are operating at scale in a large firm with resources and adding value to the investment process and crucially if you’re an integral part of that investment process then you are a fundamental part of that investment proposition. It might suit some but not all by any stretch.

Which panels are you most looking forward to tuning into at TradeTech?

I’m interested in all the data and analytics and FinTech sessions that are being run. I joined the diversity and inclusion virtual boardroom earlier this month which was open to buy-side heads of trading. Cognitive diversity achieved through a diverse team is very important. People look at problem solving in different ways. 

Trading desks have done a reasonable job in promoting and encouraging cultural diversity. It’s no surprise to hear me say that trading desks have been less successful in trying to meet the challenges of gender diversity. I am interested to see how the debate plays out at TradeTech. However, I don’t think we can just talk about diversity and inclusion in general terms. It is helpful to be clearer about what it is we’re talking about and trying to frame the debate in a more granular fashion. There are some aspects that we have done very well at and others where we have done less well.

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They, among other index tracking investment vehicles, have become popular in this increasingly passive era, as the market continues to question whether active investment can outperform passive strategies that, in some cases, cost investors half as much in fees.

Similar to a mutual fund in that they typically track an index, ETFs differ from other passive instruments as they allow a basket of stocks to be traded in one transaction on an exchange. Unlike mutual funds, ETFs also offer intra-day access to liquidity. This can minimise risk and transaction costs, while allowing traders to gain price discovery with low information leakage.

In Europe alone over the last eight years, ETFs have grown at an annualised rate of 20% in terms of assets under management (AUM) with over $1 trillion of notional now held in European listed ETFs.

Chief among the reasons behind the steady uptake in ETFs is the continuous compression of margins in the asset management industry as investors increasingly expect more for their money and favour cheaper products.

Jason Xavier, head of EMEA ETF capital markets at asset manager and ETF issuer, Franklin Templeton, says the global pandemic is another reason that the market’s uptake in ETFs has accelerated.

“If you look at the volatility we saw last March at the outset of the COVID-19 pandemic, the subsequent successful operation of ETFs and the ETF ecosystem in allowing investors to source liquidity and reallocate capital intra-day was, for some, the final success hurdle needed to validate the ETF wrapper,” he explains.

Pushing boundaries

As the market has continued on its trajectory towards cheaper investment strategies in a riskier pandemic-driven environment, a new type of active ETF has been born. At face value, active ETFs tick all the boxes by offering risk averse investors who are looking to cut costs access to a version of active investment.

According to Howie Li, head of ETFs at asset manager and ETF issuer Legal & General Investment Management, active ETFs fall into two categories. These include thematic ETFs which are based on underlying stocks that have been selected through research, and discretionary active ETFs that have a fund manager making buying and selling decisions.

“Certainly, in the last three or four years the boundaries continue to be pushed as to what should be defined as an ETF and what is classified as an active strategy,” says Li.

“What we have done is active design, we select stocks that are specific to the cyber security universe, or robotic universe, because these are all opportunities that are not traditionally defined. We built these investment strategies in a way that is very similar from a client’s point of view to the active experience.”

This form of thematic ETF stock picking derives from the market’s journey away from how investors think about asset allocation. Previously, asset allocation for ETFs was based on regional indexes, however, as the market has become increasingly globalised this method has become sub-optimal.

Wholly active ETFs that have a fund manager responsible for buying and selling have also seen an astronomical spike in interest. However, the interest is predominantly limited to the US. Founder, CEO and chief investment officer at ARK Investment, Cathie Wood, for example, has taken the market by a storm recently with 152.2% returns on her actively managed ETF funds in 2020.

According to a recent report by FactSet, 2020 was the first year that there were more active ETFs launched in the US than passive ETFs that track an index, with actively managed ETF funds bringing in a total of $56.1 billion over the period.

On 26 March, Guinness Atkinson Asset Management became the first investment firm to convert two mutual funds with assets of $21 million to actively managed ETFs. US investment bank Citi also confirmed plans to work with Dimensional Fund Advisors to switch six mutual funds, with total assets of $20 billion, to the active ETF wrapper in 2021.

Despite the active portion of the market only making up 3% of the $8 trillion total value of the ETF industry, these moves could represent turning tides as the mutual fund market and its lack of intra-day liquidity becomes more and more outdated.

Final hurdle

The US market is undeniably leaps and bounds ahead of Europe in its uptake of more actively managed ETFs. This is largely due to the Security and Exchanges Commission’s (SEC) recent relaxation of its regulation in 2019 that allowed for more discretion in ETFs.

The SEC recently introduced new regulations that allow for discretion when disclosing which stocks are within an ETF wrapper, meaning ETFs no longer have to make public their holdings on a daily basis.

With one of the foundation pillars of ETFs being transparency, prior to this change in regulation they were not favoured by active fund managers. Many view their stock picking abilities as intellectual property and therefore do not wish to disclose the information.

“There are active ETFs in Europe of course, but they’re still required to disclose their portfolio holdings on a daily basis. It limits the number of products that these issuers are looking to launch because they’re not necessarily comfortable with having that openness and transparency around their active trading strategies,” says Steve Palmer, global head of ETF products at HSBC Securities Services.

“If we got to a position where the wrapper allowed for a similar structure to what the US is comfortable with through the SEC’s positioning of these active products, then I can certainly see that being a trigger point for the European market to start using the ETF wrapper for active products.”

Regulation remains the final hurdle between the European market and the wave of actively managed ETFs that has swept across the US.

“The European market predominantly still expects ETFs to be transparent, but investors are on a journey to understand and see what more ETFs can do as it moves towards the active end,” adds Legal & General Investment Management’s Li.

Diluted liquidity

Whether actively managed ETFs can outperform passive rules-based ETFs and vice versa remains up for debate. However, one clear impact of the rise in active ETFs is the greater variety of choice that investors have.

Li explains that as more active strategies come to market, asset managers that previously did not issue ETFs because they lacked the index capabilities could now do so, meaning the ETF market will continue to grow.

“If more active strategies are launched in an ETF wrapper, it means there is greater potential for investors who prefer active management to look to the ETF market for solutions. This can lead to more volume, which means more possible business for institutional traders,” adds Li.

“Suddenly the mutual fund has been listed on a stock exchange and it’s using the same infrastructure as trading Vodafone. As more of this market builds, there is more available business for traders to try to capture.”

Active ETFs do, however, bring with them an additional layer of risk that passive ETFs do not. For one, there is the additional risk in the judgement of a fund manager to pick and choose when to buy and sell.

“If you go for discretionary management, you are trusting the skill and judgement of that portfolio manager or investment team. If you look back at history, some managers can get it right and some don’t – being consistent through all market cycles has been a challenge,” says Li.

It could also prove difficult to convince market makers of the merits of active ETFs taking centre stage in Europe. Market makers create individual buying and selling markets between issuers and investors, operating on small margins made from each transaction.

It is because of these small margins that they prefer as much transparency as possible. If they know the exact value of an ETF it allows them to trade it more easily.

“Market makers, such as ourselves, need to fully understand the constituents of the basket they are pricing. While this is straightforward in passive ETFs, the constituents of an actively managed ETF are variable, which adds complexity and sometimes lower transparency. As a market marker, our trading desk can only price such instrument when its fully up to speed with what is in it,” says Ron Heydenrijk, European head of sales and external relations at Flow Traders.

“Actively managed ETFs are typically more difficult to hedge, because the further you go away from the general benchmarks the less derivative products you can use to hedge.”

Elsewhere, the fragmented nature of the European market could be slowing the progress of active ETFs, as its various currencies, geographies, settlement depositories and exchanges mean that a significant portion of ETF trades are not conducted on exchange.

“We see a good percentage of [ETF] trades done via multi-lateral trading facilities (MTF) as well as on-exchange, with approximately a 70/30 split between MTFs versus on-exchange activity in Europe,” says Franklin Templeton’s Xavier.

The natural fragmentation of the European market has diluted the liquidity available on exchange and subsequently forced ETF traders to find liquidity off-exchange in the form of request for quote (RFQ) platforms.

“Relative to the US, there is lower on-screen liquidity in Europe. There is, however, significant off-screen liquidity through RFQ platforms, which put market makers in competition with each other, offering institutional investors an efficient way to trade large blocks at attractive spreads,” adds Heydenrijk.

Consolidated tape

Along with diluted on-exchange liquidity, the lack of a consolidated tape in Europe means ETF traders cannot see the volumes taking place off-exchange, in effect blinding them.

“In Europe and the UK, only ETF trades that are traded on-exchange are published and it pretty much ignores 90% of the transactions in Europe, which is pretty crucial. A consolidated tape is essentially going to show both on-exchange and off-exchange, how many deals are happening,” says Li.

“If you want to understand the true liquidity of an ETF and understand how much volume is going through it – investors currently do not have full visibility. They know in the US but they do not know in Europe. The consolidated tape is something that everybody wants.”

While there is no concrete correlation between the number of active ETF launches and a consolidated tape, in offering participants more transparency on the volumes taking place on and off-exchange this could encourage more active strategy-based ETFs to take hold in Europe.

The European Commission recently pushed for the establishment of a consolidated tape in the European primary and secondary bond markets in its upcoming MiFID II review following pressure from market participants. Any concrete action on this is yet to be seen.

Ultimately active ETFs have a way to go before they are welcomed with open arms in Europe in the same way that they have been in the US. However, evidence has shown that they are on the rise and the line between active and passive is continuously moving.

As the face of the ETF continues to evolve, investors will have the opportunity to dip their toes into various pools, picking and choosing tailored investment vehicles that contain a flavour of both active and passive strategies.

“It is a question of how you want to access an active manager’s ideas. If you can use an ETF to perhaps do that, that might be the preferred choice for clients and end-investors,” concludes HSBC’s Palmer.

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The Investment Association confirmed that Keith Skeoch, CEO of Standard Life Aberdeen, has been appointed chair of the board, while Michelle Scrimgeour, CEO of Legal & General Investment Management, and Patrick Thomson, CEO for EMEA at JP Morgan Asset Management, have been appointed deputy chairs. 

“Given the pace and scale of the changes faced by our industry, here in the UK and internationally, it has never been more important to have a strong voice speaking up for the investment management industry,” Chris Cummings, chief executive of the Investment Association, said. 

The senior appointments follow a board meeting and vote earlier this week, with all three buy-side bosses due to start their roles on 1 May this year. The Investment Association added the move aims to bolster the trade body’s long-term direction. 

“The asset management industry plays key roles in allocating capital to businesses and infrastructure projects, engaging with companies on ESG issues and importantly helping millions of people achieve their long-term financial objectives. I am honoured to be appointed chair of the board of the Investment Association,” Skeoch commented.

Skeoch replaces Peter Harrison, CEO of Schroders, who has been chair of the board for the past three years, and Scrimgeour and Thomson both replace Skeoch, who previously served as deputy chair of the board.

“I very much appreciate the confidence of my board colleagues and look forward to playing my part in ensuring that we have robust conversations around the future direction of our sector. As the industry’s trade body, we must continue to evolve and support the highest standards for all savers and investors,” Scrimgeour added.

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The UK-based asset manager initially adopted Charles River’s IMS for pre- and post-trade compliance, but the expanded partnership will see LGIM use the cloud-based system for cross-asset order management. LGIM is looking to consolidate its trading and processes in index, liability driven investment, equities and fixed income.

“LGIM’s continued growth in local and international markets highlighted the need for a scalable solution to centralise order management processes across all asset classes,” said Ed Wicks, head of trading at LGIM. “Our partnership with Charles River will bring significant efficiencies to our trading operations, allowing us to further evolve our global model, to the benefit of our clients.”

Charles River became part of Boston-based bank State Street late last year, after the institution acquired the firm for $2.6 billion. The custodian expanded its front-office services significantly, with the flagship Charles River IMS servicing buy-side firms in more than 30 countries collectively managing $30 trillion in assets.

“Increasing workflow and pressure on trading desks is driving investment managers to adopt greater automation across their investment processes,” said Gavin Lavelle, managing director for EMEA at Charles River. “By consolidating onto a centralised, cloud-based platform like Charles River IMS, firms have the flexibility to simplify their business model, expand product offerings and support growth.”

In February, Tokyo-based Nomura Asset Management went live with the Charles River IMS for global and multi-asset trading processes. Providing the investment firm’s traders, portfolio managers and compliance teams with decision support, trading and compliance tools, the system covers fixed income, equity, foreign exchange, institutional and mutual funds.

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