With Paul Collins, Head of Trading EMEA, Franklin Templeton
As we enter 2015, the main focus for our industry participants has been on MiFID II and the ramifications for Europe and beyond.
In my mind the attention is two-fold; a focus on the impact that MiFID II has in terms of the use of client commissions to pay for research, and the emphasis on better execution.
From the research perspective the industry across Europe may be forced to truly unbundle research from the execution process. We have talked about it for long enough, but MiFID II will most certainly encourage this to happen.
The buy-side and the sell-side may be forced to put a monetary value on research. The sell-side will have to come up with a form of pricing and the buy-side will need to show that the research it consumes has value. This change will certainly overhaul the industry especially given the length of time the industry has been paying for research in this way.
As the industry in Europe continues to be driven towards unbundling, differences will emerge between Europe and the US in terms of commissions and research payments. There could be a significant contrast between these two regions and it will be interesting to see how they come together.
Best execution is also very much to the fore for the buy-side in MiFID II, this follows the FCA’s recent thematic review. While the focus of the FCA’s review was on the sell-side, there is no doubt that the emphasis will fall equally on both (buy- and sell-side) to prove we are achieving ‘best execution’, especially given ESMA’s latest comments late in 2014.
We have been fortunate at Franklin Templeton to invest in key resources from a technology perspective, which has allowed us to pursue best execution practices across all our markets.
We have a proprietary OMS, providing us the ability to be more agile and make changes in a timely fashion without having to wait on an external provider. We can readily, adapt and update our OMS by utilising our team of programmers that are focused primarily on maintaining and enhancing this trading technology.
The build versus buy debate for technology is a perennial one, across the whole of our technology platform. We do have a number of systems that we have built and are maintained internally, but we also leverage products off-the-shelf or collaborate with outside vendors to help build exactly what we’re trying to achieve. It really depends on the specifics we require and the competitive advantage it will derive.
Technology has always been the focal point of what we’ve done on the trading side ever since Mat Gulley joined Franklin Templeton almost 20 years ago. Mat, then as Global Head of Trading and Bill Stephenson who took on Mat’s role last year, have always recognised technology as an advantage to our desk as markets evolved and changed.
It is not just about technology, our global trading platform with experts on 12 desks around the world bring their own unique expertise. This provides unique insights which we apply to execution and drives how we collaborate with our investment teams around the world. For example, we have a trading desk in Dubai with a focus on the Middle East and Africa. The desk provides us with market knowledge and expertise which is applied to both the execution and investment process. Having local expertise on the ground, local relationships plus this knowledge is invaluable when you’re trading in less penetrable markets.
Technology that is co-ordinated globally further enhances the execution process. Sitting in Edinburgh, I can see every trade that’s happening live around the world. If there was a disaster recovery situation in Hong Kong and we need to pick up trading for them, we can do so seamlessly. Some initiatives we undertook were order and execution audit trail projects. We looked at market structure and recognised what was happening in the markets in terms of algorithmic trading and high frequency trading and decided to be proactive in how we leverage both our technology and execution processes globally.
We realised the need to have more transparency, so we crafted the project to require the execution and order data needed to understand exactly what was happening with our orders in the market: where are we having the most impact, what algos are performing the best, what venues are performing better, and why does one broker favour a certain venue over another.
We have been able to use that data to approach brokers and trading venues as a conversation point for a two way discussion on the mechanics of their algos and matching logics, to the point of highlighting where they may not be working as well as we would expect. MiFID II will not only drive greater transparency around order flow, but it will also increase the onus on the buy-side to ensure we understand what is happening to our orders. In terms of best execution, the two key elements we are looking at are the technology that the brokers provide in terms of SOR, and the execution decision – how are we going to trade this stock? The evidence that we’ve got: the technology, skill-sets, processes, and outlook will be a key focus to determine this decision. We are also up-streaming through collaboration with the portfolio managers, which will become more important as we look to enhance the wider investment process through execution.
The more electronic trading we do the more we have to rely on our own team and the technology that supports it. We are now able to do more analysis on the pre-trade, post-trade, and intra-trade; real time processes that look at trades as they happen.
When MiFID I was initiated and the market opened up to competition, it was fragmented and there was a tendency to just accept what the brokers were giving us because we weren’t building our own algorithms or SORs. As we have gone through this whole process and built out the tools, the brokers have become much more collaborative.
Going forward brokers, exchanges, and other trading venues, will have to be much more transparent, and so will we. We have to be prepared to be asked questions by our clients and be able to demonstrate that we understand our processes as well as what happens to client orders once they interact with a broker’s algos.
We are going to have to be in a good position to provide evidence that we are achieving the best execution for our clients. Whether it’s electronic trading, which continues to increase, or via a traditional broker, the execution decision itself lies with us.
However, there remains an objective for best execution that brokers need to ensure they’re fulfilling. The assurance that they’re getting us the best price, and that they’re going to the best venue under the circumstances.
At the micro-level when we are trading and something happens to the stock outside of its normal parameters, i.e. when a stock is outperforming/ underperforming its peers, the spread widens or tightens significantly or volumes increase significantly; we want our traders to have access from a live perspective to these intra-day signals. Traders need to be able to recognise what’s happening to their order flow and react in real time and change their execution decision process.
We compliment this information with proprietary technology – our Investment Dashboard and internal idea generation systems coupled with the external signaling tools enable the traders to separate meaningful signals from all the noise, and efficiently interact and collaborate with our investment professionals.
There is a lot that technology can do, and we continue to progress down this electronic route to ensure that the traders have the tools and the knowledge in real-time needed to be able to react. Once you bring all that together, it changes the traditional dynamics between buy and sell-side.
There is always a little bit of debate around whether regulation is going to stifle technological innovation and development. From our perspective, we continue to develop our electronic trading capabilities and know how, to ensure constant innovation in our trading processes.
So what’s next? More disruptive technology, social media, and new technologies that will impact how we trade, gather and manage our data technology which will continue to move as we do.