How to add value in the Dealing desk?

Transcription

Fabien Oreve, Global Head of Dealing desk
Brussels, Central Bank Seminar, April 18th 2012
Money does not perform. People do.
Content
I. Enhance team’s efficiency
II. Reduce transaction costs
III. Increase productivity through technology
IV. Improve relationships with counterparties
V. Provide more services to clients
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Dexia Asset Management
I. Enhance team’s efficiency
Choice of order centralization through one multi-asset class Order Management System (OMS)
Focus on specialization and seniority of the trading team (10+ years of experience):
Fixed-income (2-3 traders)
– Fixed-income execution presents specific challenges such as labor intensive activity, non-exchange “OverThe-Counter” trading and opaque pricing
Equities orders (2 traders)
Derivatives and foreign exchange (1-2 traders)
Each trader is supported by a back-up colleague to face any absence or vacation
Added-value: Centralization means business & news flow concentration which improve efficiency. Staff specialization
incentivizes individual traders and triggers motivation
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Reduction in transaction costs is a key priority of the Dealing desk and requires a strong trading commitment from the team:
(1) Identification of the order characteristics & trading risks; (2) Trade implementation & monitoring; (3) Post-trade analysis.
The Dealing desk has an organized approach to execute different types of orders and is reinforcing its Best execution policy
Reduced transaction costs in Equities
For large size orders, the Dealing desk has to:
– 1. Intensify search for natural liquidity through checks of Indications-of-Interests
– 2. Access to Dark pools and select those that are block-oriented & offer the highest fill rates
– 3. Ask for risk prices to selected large brokers if trades have to be done urgently
Added-value: The Dealing desk trades more orders out of the traditional exchanges; last year it traded 12% of equities
volumes through phone-based block-trading and 8% in Dark pools, meaning market impact savings
For small size orders, the Dealing desk is going to have a direct use of algorithmic trading for market orders below 3%
of Average Daily Volume in Western Europe, excluding Program trades
Added-value: The Dealing desk is taking more control of the trading process; it is going to take advantage of lower commission
rates (8 bps instead of 13 bps) for this order category
For Program trades, the Dealing desk selects specialized brokers that have technology and highly-stable systems
Added-value: The Dealing desk cut PT commission rates by 40% last year, concentrating business on a shorter list of
specialized brokers and outperforming closing prices by 1+ bps on average
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Reduced transaction costs in bonds
The Dealing desk works bonds on trading platforms, pre-checks indicative prices and axes, requests for quotes between
various brokers with the exception of different cases where phone-based trading is the rule:
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Any instrument traded in Emerging markets
Any order above 2 million Euros nominal for Corporate bonds
Any order above 10 million Euros nominal for Government bonds
Added-value: The Dealing desk places more emphasis on the identification of subsets of dealers for any specific bond and
targets only those counterparties that are most likely to transact to minimize the risk of information leakage
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Increasing market fragmentation and challenging market environment have pushed the Dealing desk for asking some upgrades of
the Order Management System (OMS) and some developments around pre-trade, real-time Transaction Cost Analysis (TCA) and
post trade analytical tools:
Pre-trade evaluation of data
For equities: the Dealing desk pre-analyzes orders through the same cost model (ITG Logic) integrated in the OMS
Real-time TCA
The Dealing desk does not only need Straight-through-processing and fully integrated trading platforms but also real-time
measure of execution performance across various asset classes
Post-trade analysis
For equities: the choice of an independent TCA tool (ITG) that is integrated in the OMS and is able to adequately
measure brokers against other brokers is important to analyze brokers’ execution performance
For bonds: the Dealing desk relies on internal statistics including market shares, hits ratios and business segmentation
per counterparty
Added-value: These technological tools help the Dealing desk concentrate on the most difficult orders and distinguish the
counterparties who provide improved execution and those whose performance is mediocre
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1- FIX-based order routing | Thomson Reuters Autex

System that routes orders electronically and securely to our counterparties across different global asset classes: equities,
government bonds, corporate bonds and listed derivatives
2- Order/Execution Management System | Charles River Development (CRD)

Order/Execution Management System from CRD which is a multi-asset class software solution that provides full straightthrough-processing on a single consolidated platform and automates pre-trade, in-trade, order & execution management, postexecution. High-level of configuration and integration.
3- Transaction Cost Analysis tool | Investment Technology Group

Execution quality measured by a custom defined benchmark selection mechanism based on a trade / execution characteristic.
Daily / monthly post-trade reports.
4- Multi-Dealer Bond Trading platforms | Tradeweb and Bloomberg TSOX

Fully electronic & integrated bond trading solutions
5- Multi-Dealer Foreign-Exchange trading platform | FX-All
6- Equities Algorithmic trading tools | UBS
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IV. Improve relationships with counterparties
The Dealing desk helps identify brokers’ specific strengths, categorizes them and builds up long standing relationships on those
strengths with them. The Dealing desk needs to make sure brokers are well represented in each one of those categories to serve
clients in the best way
Improved relationships with Equities brokers
With the recent proliferation of High Frequency Trading, the use of Smart Order Routing is not a sufficient condition of
improved execution. The difficulty in trading large orders within the displayed order books is a big challenge and the
Dealing desk has to work with the brokers who offer block-trade opportunities
With commission rates under pressure and a smaller commission pot to share around amongst brokers, we have to
manage our broker relationships and balance Best execution against the key services we need to retain
Improved relationships with Bonds market-makers
The decline in liquidity from certain market makers has affected the way the Dealing desk trades
The Dealing desk trades larger orders by phone and diversifies its access to a larger range of counterparties
Positive effects are a better knowledge of counterparties and a greater reliance to contacts in the business
Added-value: The brokers & market-makers have to approach the relationship with us from several angles. In volatile markets,
if a broker provides significant value in execution, market share can exceed commissions target. For example, if the fees of a
top quality broker exceed our target in Equities, business opportunities can be discussed in other asset classes.
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V. Provide more services to clients
More communication about execution performance
The Dealing desk has improved communication with Portfolio managers for large orders in both Equities and Fixed-
income about liquidity issues, execution strategies and broker/dealers capabilities
Commission Sharing Agreement (CSA)
The main incentive for CSA is the increasing demand from our Portfolio managers to have a broader access to quality
research and get research from independent third-party providers, especially in emerging markets
The Dealing desk is finalizing some discussions with an execution-only broker to implement CSA on a global basis by the
end of 2012
Cost-efficient solutions in transition management
In Equities: the Dealing desk has agreed with a global broker (Credit Suisse) on a closing structured trade to minimize
the transition costs and optimize the execution results. The transition trade can be carried out at 0 basis point
commission rate at guaranteed closing prices with additional profit split on any outperformance versus the closing
benchmark (50/50 basis)
In Bonds: the Dealing desk can trade the switch of bonds with a partnering bank (Belfius Bank) at Bloomberg BGN mid
pricing plus 1 basis point of fees only
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Money does not perform. People do.
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