Fabien Orève, Global Head of Trading at Dexia Asset Management
We have tried to clarify how we can manage an easy, productive method to meet our clients’ needs as well as categorise these needs into only a few groups of trading strategies. We have fundamentally identified two groups of trading strategy. The first is market orders, which are widely used from equities to bonds and foreign exchange. Equities market orders are obviously for momentum active funds. They just want to trade immediately and they ask us to use an implementation shortfall strategy. If you take bonds, we use multi-dealer trading platforms where RFQs are widely used. It’s often easy and as it is OTC we execute straight away.
Foreign exchange is pretty new to this field. We used to trade Forex as a hedging instrument on the 4:00 pm London fixing, especially for equities funds that are benchmarked versus large indices. So essentially our clients want us to minimise currency risk but recently we’ve seen some clients in the bond side trade Forex markets because Forex can help them generate alpha. Our FX trading platform provides us with an average of bid-ask spread provided by the banks we have gone to.
All of the asset classes are converging in the way we compare our market orders with a benchmark that is more or less current price in all of these markets, regardless of whether it is OTC or regulated. We have a pretty good way to assess this performance.
Behind implementation shortfall there are lots of trading tactics to employ. You have to identify your clients and their levels of urgency. That means for market orders, we split them into two subgroups. One is pure market orders – trading as fast as possible.
The second subgroup is market care orders. That means we have more flexibility to work an order in the market within a timeframe. We have been able to do this in equities for some time, but now, in other asset classes, technology and market structure allow you to use other ways to manage this order type more efficiently. Whatever the tactic is, you will be measured. I want my guys to be measured from one benchmark, which is arrival price. You have one strategy, you have different tactics, there is only one measurement. Then, we can talk about the impact of market conditions on trading performance.
The second big group of trading strategy is on closing. But closing has many different ways to execute. You have liquid, very easy business. You can get the order done during a closing auction for example in equities. In European bonds, you can get as close as possible to the time trigger that will be around five thirty our time. We try to concentrate easy liquid business around this specific time, but there are other tactics to target closing. In less liquid European equities, you have to start earlier; you have to use other ways to get part of your order done then keep a portion for the closing auction time.
“All of the asset classes are converging in the way we compare our market orders with a benchmark that is more or less current price in all of these markets, regardless of whether it is OTC or regulated. We have a pretty good way to assess this performance.”
This closing strategy is also benchmarked. When there is a specific price at a specific time we will use it as a benchmark. For example, we can capture a composite reference price for bonds, and in Forex we will use the 4:00 pm London fixing rate. We know these benchmarks may be subject to controversy but TCA helps us analyse price movements at and around the closing time.