By Rudolf Siebel
Rudolf Siebel, Managing Director of BVI Bundesverband Investment und Asset Management, shares the perspectives of German asset managers and their needs and goals for the coming year.
Technology and Trading Costs
BVI represents German investment fund and asset managment industry which manages ¤1.7 trillion in assets such as bonds, equities and derivatives. Trading is an issue dear to our hearts. In particular, we welcome the improvements in electronic trading over the past decade especially those based on standards, such as the FIX Protocol, which enable automation based on standardization. That is one of the reasons why we became part of the FIX community in September 2011. Costs of trading have certainly fallen over the past few years, particularly with regard to the costs charged by brokers and venues. Also, trading costs have been implicitly lowered through a reduced market impact. Our members sense that with electronic trading they can be much closer to the market and limit the loss of market value because of the latency in trading. Our members, however, have seen that the cost of support and analytics has not fallen. Some also believe that the buy-side trading volume side had declined and that the sellside volume is on the increase.
Value through Innovation
Having discussed issues of electronic trading within our industry, I think the increased ability to analyze market impact and trading costs has provided value. Over the past few years, our membership has seen value shift very quickly to better market access, especially through smarter routing technology. Based on mutual studies, only about 65% of the turnover of the DA X is now on the Deutsche Boerse, and for the FTSE 100, only 50% is now on the LSE. It is absolutely vital for our members to be able to access different liquidity pools, whether lit or dark. Smart algorithms have become a main issue, but not necessarily in view of improving low latency. Our members are asset managers who base their decisions on the selection of securities and asset classes, not necessarily on squeezing out each latent nanosecond. As a result, low latency trading is a secondary priority for BVI’s members, but smart order routing is obviously important given the large number of venues in the European market. At my latest count, there are about 70+ different types of trading venues, be they exchanges or other trading platforms.
Volatility and Connectivity
We are now in a market where there are no longer any safe havens among asset classes, and in times of high market volatility it is absolutely necessary to link your internal systems to outside trading platforms in order to be flexible and quick to market. German asset managers have yet to establish connections across asset classes, and the FIX Protocol is very important as a basis for discussing the connectivity issue. Going forward with Dodd-Frank and new regulation on the European side, the the connectivity with Central Counter Parties (CCPs), will also be a big issue for 2013 and 2014. As far as it is possible, connecting to all markets and asset classes in an electronic way, and connecting to more CCPs will be the challenge for next few years.
There is a trend to outsource in the German marketplace, but that is more applicable in the front or middle office and in operations. From a trader’s position within an asset manager, market impact is an important part of the final performance of our product. There is a reluctance to outsource trading, and that applies to both trading decisions as well as execution. BVI’s members use technology platforms provided by vendors but not in the sense that we outsource the full trading process to a broker or another asset manager.
As asset managers, we need to retain the legal responsibility for the trading decisions. A point that you would always have in the back of your mind is whether the other party is using your intellectual property to optimize their own trading. The Pipeline case, for example, has been a reminder that, in a dark pool, the operator has their own stake. Cases like that certainly do not help to improve discussions on outsourcing trading.
Priorities for 2012
The first item our members would like to address relates to the new MiFID II release: the ability for institutional investors to execute large trades without excess market impact. We would be very reluctant to have regulation which would put a stranglehold on dark pools. Whilst some of our members see huge benefits in the market for high frequency trading, lit markets that do not curb high frequency trading place large institutional traders at a disadvantage. We need the ability to execute trades in dark pools in a regulated environment.
The second item relates to the proposal suggesting that fixed income trading will be modelled on the basis of equity trading, and we do not think that this is ideal. This proposal is somewhat premature. In spite of the evolution of electronic trading in the bond market, the overall market is still driven by banks providing capital. To apply the equity market structure to the fixed income market is a long term objective that I think everybody would like to see, but it is premature in the short term. In the long term we would like to see an open market structure with many vendors and buyers in the bond area too. Particularly during these challenging times in the government bond market, it is, however, imprudent to require an equity market structure be set up for the bonds. We would urge the Commission not to move too quickly, but to provide intermediate steps which recognize the importance of the existing bond trading system.
Moreover, we welcome the European Consolidated Tape (ECT) as a transparent pricing mechanism, but the bigger issue will be its implementation. We clearly support the ECT and in September the European Fund and Asset Management Association (EFAMA), of which we are a founding member, published a blueprint on the ECT, suggesting some of the structural features that the buy-side would like to see.