One of the biggest themes in ETF evolution over the last few years has been in the increase in scope of products offered to the market. With increased competition, new launches are now targeting gaps in investors’ universes with more specific products. This has been witnessed across asset class as well as developments in actively-managed funds being launched in an ‘exchange traded’ wrapper. Some more recent examples would include funds tracking crypto, ESG or other fundamental factors such as quality or income. 

This increase in product type has widened the pool of prospective investors – both institutional and retail – and the competitive nature of the industry has seen costs reducing, which in turn brings ETFs to more investor’s attention. This expansion in both client-base and products has led to a rapid growth is assets and trading volumes.

Consequently, ETF trading techniques have evolved to source new pricing opportunities either via electronic Request For Quote (RFQ) platforms and/or ETF algos and to take advantage of ETF trading provision at the exchanges themselves. We have also seen traditional ETF liquidity provision firms moving into forming bilateral relationships with buys-ide dealing desks which has further strengthened ETF pricing.  Finally, there has been significant innovation in the ETF post-trade analytic capabilities for traders – either developed inhouse and/or utilising third party solutions creating a deeper understanding of implementation costs which can be used to improve future trading outcomes.

What role are active ETFs playing in the progression of this asset class? 

When the investment backdrop becomes more challenged, investors have to take greater consideration of investment risk rather than simply buying market exposure (beta) in order to generate positive returns. Actively-managed ETFs complement a passive approach, by providing access to specific investment processes designed to achieve specific results such as index outperformance, income generation, or factor tilts such as quality, duration or yield, all while maintaining the attributes of the ETF structure. 

Active ETFs have been released across different asset classes and have appealed to new and old ETF investors alike as they provide middle ground between passive & active investing. Through active ETFs, managers are able to offer access to internal intellectual property and house expertise such as bottom-up stock research, allocation weightings etc that not only differentiate their product but can help investors generate alpha for a portfolio alongside core passive holdings.

What are the impacts of fragmentation linked to ETFs? 

The most obvious impact of fragmentation has been on the perception of an absence of secondary-market liquidity. This has mostly likely, held back some adoption of ETFs from investors but has also led to increased innovation from all market participants to source, aggregate and efficiently price ETFs. RFQ platforms have taken the lead for traders when seeking risk prices as they reduce the opportunity cost of requesting prices from multiple liquidity providers but in an information-controlled manner. Traders have also adopted more dedicated ETF trading algorithmic strategies launched to empower dealers with the ability to access a wider range of liquidity pools at differing urgency settings which alter the child-order placement logic, often within fair-value frameworks.

On the opposite side of the trade, market makers and liquidity providers constantly search to improve efficiencies within their processes to better utilise their balance sheets to offer tighter pricing and/or greater liquidity. Fragmentation, however, means that market makers have to disperse their liquidity among multiple exchanges and trading venues reducing the volume available in each. Additionally, the costs associated with post-trade fragmentation (Central Counterparty Clearing & Central Securities Depositories) further reduces the cash market makers can commit into the market, instead having it tied up to satisfy post-trade provisions.

What can be learnt from the US? 

Aside from the simpler US ETF market ecosystem, the European ETF market would greatly benefit from increased retail ETF adoption and participation as seen in the US. Technology firms are looking to help platform providers streamline the ETF process, reducing complexity where platforms may currently struggle due to legacy systems, in order to increase/improve the ability of platforms to offer more ETF trading to their clients. Increasing adoption of ETFs from the retail community combined with improved connectivity from platforms to exchanges creates opportunities for buy-side dealers to interact with these improved volumes on exchange as professional and retail volumes create a better dynamic for orderbook trading.

Improvements could also be made in financial education – from school age through to adult investors. With greater demands being placed on individuals’ long-term savings capital, a deep and sound knowledge of all financial products would encourage people to take more control of their investment solutions at an earlier age and low-cost ETFs are well placed to form part of their investment toolkit.

The post Fireside Friday with… Fidelity International’s Tim Miller appeared first on The TRADE.

These innovations have attracted a wide range of investors – from institutional to retail – who seek to increase returns and manage risks in an ever-shifting market environment. However, huge disparities exist between trading volumes in the US and Pan-European markets. 

Looking at the data, iShares by BlackRock reported that in the first quarter of 2024, trading volumes for US ETFs were at $10.6 trillion. In Europe, ETFs accounted for $782.9 billion in the same period. This can be attributed to differing ways in which active ETFs are adopted, fragmentation in Europe, differing levels of retail engagement, as well as the presence of an established consolidated data source in the US. 

A key theme linked to the evolution of ETFs globally has been the increase in scope of products offered to the market. Product type enhancements have led to a wider range of prospective investors. As a result of this increased demand and competition, costs have risen, which have ultimately led to ETFs attracting more attention from investors. Assets under management (AUM) and trading volumes for this asset class have experienced a significant rise over the last few years. 

“Consequently, ETF trading techniques have evolved to source new pricing opportunities either via electronic request for quote (RFQ) platforms and/or ETF algos and to take advantage of ETF trading provision at the exchanges themselves,” says Tim Miller, senior trader at Fidelity International. “We have also seen traditional ETF liquidity provision firms moving into forming bilateral relationships with buy-side dealing desks which has further strengthened ETF pricing.”

Active ETFs

Actively managed ETFs have introduced a new dimension to the ETF landscape. The instruments combine traditional active management with the liquidity and transparency of ETFs, while providing access to specific investment processes such as index outperformance and income generation, alongside maintaining the key characteristics of ETF structures. 

“Active is a game changer and it’s going to broaden the audience yet again for the product set. It’s going to disrupt the traditional mutual fund market and I truly believe it’s going to position ETFs as the wrapper of choice for managers,” says Chris Gooch, head of ETF/index sales and business development, EMEA at Citi. 

“What’s particularly notable is the willingness of big asset managers to launch their latest active strategies in an ETF wrapper. And for me that means that every asset manager is going to need to have a clear strategy of how they’re going to respond.”

The US market is undeniably ahead of Europe in its adoption of active ETFs thanks to the Securities and Exchange Commission’s (SEC) relaxation of its regulation in 2019, which resulted in more discretion in ETFs.

The relaxation meant that ETFs would no longer have to make their holdings public on a daily basis, which became more attractive to active fund managers who view their stock picking abilities as intellectual property. Within Europe, disclosure on portfolio holdings is still required on a daily basis, and has previously stifled adoption in the region. However, with time, adoption of active ETFs is becoming more apparent. 

“The impact of there being more acceptance of active ETFs within Europe means that when you look at trading costs like spreads or the creation redemption costs, you’re starting to see them narrow and become more like passive traded ETFs,” notes David Smith, head of ETF sales at SIX Swiss Exchange.

“There’s less difference between the two and we’ve seen the popularity certainly increase in active ETFs. All that being said, active is a small part of the European ETF industry, accounting for approximately 2% of AUM according to ETFGI as of April 2024.”

Active ETFs have been released across different asset classes and have appealed to new and old ETF investors alike as they provide middle ground between passive and active investing, emphasises Miller. 

“Through active ETFs, managers are able to offer access to internal intellectual property and house expertise such as bottom-up stock research, allocation weightings etc that not only differentiate their product but can help investors generate alpha for a portfolio alongside core passive holdings,” he says. 

Disparities in trading volumes 

Despite continued evolution for the asset class in a broader sense across the globe, it can’t be ignored that trading volumes for ETFs in the US far exceed those in Europe and the UK. This reflects a more mature and established market present in the US, with greater investor adoption and noticeable liquidity.

“At the broadest level, the US ETF market benefits from having launched the first funds around 10 years ahead of Europe and therefore is much more embedded in the investment psyche, particularly among retail investors,” highlights Miller. 

“Although the US ETF market is undoubtedly larger than Europe, the top 100 US-listed ETFs account for around two-thirds of both the entire US ETF assets and trading volumes, demonstrating that the US is characterised by a relatively small number of mega AUM ETFs and mega-liquid ETFs. Outside of the top 100 or so it starts to look a lot more like Europe.”

Several factors exist which contribute towards greater ETF volumes in the US. Europe and the UK have noticeably less AUM linked to the segment, but also, various jurisdictions, venues and clearing houses which contribute to the disparities in trading volumes. 

“In Europe, there are about 11,000 different trading lines of ETFs. That liquidity can be spread across the different countries and different listings,” highlights Smith. “There’s multiple listings of the same ETF, whereas the US doesn’t face that same problem and that can mean that liquidity is more concentrated in a fewer number of ETFs.”

ETFs in the US typically experience more favourable liquidity compared to their European counterparts, resulting in narrower bid-ask spreads and more efficient trading. Contrastingly, European ETFs often experience lower trading volumes, which can lead to wider spreads and less favourable execution for investors.

“The US has many immensely liquid, mega-sized ETFs that trade colossal amounts. Europe just doesn’t have the liquidity that the US does,” emphasises Simon Barriball, ETP and portfolio trading Europe at Virtu Financial. “We don’t have ETFs with that scale of AUM in them or anything like the daily turnover on screen in the US and that’s a huge differentiator.”

Fragmentation 

With ETFs increasingly becoming more popular in Europe, fragmentation and regulation have been pegged as two key pain points that need to be addressed going forward to boost growth in the region – a viewpoint that has been echoed at various panels at conferences in recent months. 

“The most obvious impact of fragmentation has been on the perception of an absence of secondary-market liquidity,” highlights Miller. “This has mostly likely held back some adoption of ETFs from investors but has also led to increased innovation from all market participants to source, aggregate and efficiently price ETFs.”

Echoing this sentiment, Citi’s Gooch notes that European fragmentation makes it hard for investors to get a true representation of what the actual liquidity is for ETFs in the European market. 

“That [fragmentation] has led to the perception, I would argue incorrectly, that the European market is not liquid,” argues Gooch. “This has stopped new clients adopting ETFs and has led some clients to trade ETFs listed in the US, rather than ETFs listed in Europe, even with the structural benefits that European ETFs can present to certain investors.”

Fragmentation does, however, provide some benefits, in the sense that it gives investors increased choice when considering their different objectives, where to trade and settle, as well as the types of currency they would like to execute in. It is, nevertheless, more complicated to navigate a fragmented environment, especially if liquidity does not always appear to be there across the different lines of ETFs. 

“The fragmentation in Europe extends to the fragmentation of how orders are executed. Probably only about 20% of trading is on exchange, 50% of trading is in RFQs and the remaining 30% are over SIs and other MTF type venues,” notes Barriball. “There’s also the fragmentation of trading and I think that in itself, affects the perception of liquidity as well, because you need to have a broker who can help you find where the liquidity is.”

Retail

Another key driver that leads to the disparities in trading volumes when comparing the US with the UK and Europe is the region’s differing levels of retail participation – with retail activity making up 5-7% of total trading in Europe compared to over 25% in the US . As a historically more passive instrument, ETFs have proved popular with retail investors who don’t want to take on too much risk. 

“Already, it’s a bigger market, but the split of that market is much more evenly institutional and retail,” says Gooch. “There’s much more of a trading mindset in how they’re using the products, whereas the institutional client base, particularly in Europe, is much more around strategic asset allocation and tactical asset allocation, which doesn’t have the same trading velocity.”

Retail adoption of ETFs in the US is more prevalent than in Europe largely because of a more widespread investment culture among individuals, backed by more favourable regulatory conditions. The US also has a larger variety of ETFs available and when paired with better investor education and greater access, this encourages more participation from retail investors. 

“Increasing adoption of ETFs from the retail community combined with improved connectivity from platforms to exchanges creates opportunities for buy-side dealers to interact with these improved volumes on exchange as professional and retail volumes create a better dynamic for orderbook trading,” notes Miller. 

Technology firms, in this context, are able to help platform providers simplify ETF procedures, ultimately removing complexity linked to legacy systems, to enable clients to have improved ETF trading experiences on said platforms. 

Elsewhere, looking forward, Citi’s Gooch suggests that the EU’s retail investment strategy also has potential to help boost ETF participation in the region. “Some of this was watered down from what many in the ETF industry were hoping for, but it is, at the heart of it, pushing for retail investors to be treated much more fairly,” he says. “The ETF as a cost-efficient vehicle can only win from that statement of intent.” 

Consolidated tape

Looking at potential innovations to boost ETF adoption in the UK and Europe, it comes as no surprise that one of the first things that comes to mind is a consolidated tape. A consolidated tape in Europe will enhance transparency and price discovery in the ETF market, simplifying investors’ access to real-time data across different venues. 

As a result, the improved visibility could lead to a boost in market liquidity and efficiency, which would be beneficial for all market participants. It could also lead to a boost in retail volumes if individual investors had access to a clearer view of the market, alongside more participation from institutions.

“If you understand what the aggregate volume is and the true volume, it’s a real benefit to issuers trying to get people to invest in ETFs in the first place, because you realise just how liquid they are in aggregate. The absence of that information means you have to go looking for it – and many people don’t,” argues Barriball. “A consolidated tape would have huge benefits to ETF issuers trying to get more money into ETFs, improving people’s understanding of aggregate liquidity and also for making meaningful pre- and post-trade calculations.”

Such benefits have already been observed in the US, which has had an established consolidated data source in place for years. This creates enhanced market transparency by providing real-time, consolidated trade and quote data across all major exchanges, helping improve price discovery, market efficiency, and investor confidence through the presentation of key market information.

“In the US, where we do have a consolidated tape, that has allowed for the asset class to grow at a much bigger rate from a distribution standpoint when liquidity is easily accessible, easily visible and the execution quality that comes on the back of that is just better. It’s allowed many different firms to launch ETFs and grow AUM by going out to the investor community and selling those ETFs confidently,” says Brian Gilman, ETF & FI liquidity sales at Virtu Financial.

“In the States, you’re already starting with this head start of investor confidence because of execution quality and the consolidated tape. From a distribution standpoint it’s an easier arena for sure.”

Regulators within Europe and the UK appear to be geared towards ensuring greater transparency, which is manifesting itself through a consolidated tape. However, how this will materialise when considering ETFs specifically has not yet been finalised. Regardless, it’s expected that it will help with frustrations associated with fragmentation as discussed before. 

Lessons from the US

When comparing these two regions, it’s worth considering what could be learned from the US and translated into European markets to help improve the ETF landscape. The US has a handful of very dominant exchanges, one dominant clearer and a key currency. However, such characteristics cannot directly be translated into a European context.

“There is a lot around the US that simply are structural advantages of that market which we cannot emulate,” emphasises Gooch. “However, we’ve got the innovation that’s currently happening around retail and is appealing to the next generation of investors, which is great because that’s where there’s going to be this huge passing of wealth.”

Moving forward, there are number of things that can be adopted from across the pond to help boost trading volumes within the UK and Europe. Namely, boosting active ETFs through the relaxation of regulations linked to disclosures, a promotion of retail engagement, and greater transparency in the form of a consolidated market data source, which will ultimately contribute to more liquidity. Can Europe eventually match or compete with the US when considering trading volumes for this specific asset class? Only time will tell – following in the US’ footsteps might not be such a bad idea.

The post Lessons to be learned from the US to boost European ETF growth appeared first on The TRADE.

The rapid growth in the ETF industry has been well documented and expectations suggest this will continue – both in assets and product types. Increased ETF usage among both institutional and retail investors has led to some interesting changes in trading behavior as dealers are able to take advantage of new liquidity sources and trading infrastructure developments. Increasing adoption of ETFs from the retail community, combined with improved connectivity from platforms to exchanges creates opportunities for buy-side dealers to interact with these improved volumes on exchange, as professional and retail volumes create a better dynamic for orderbook trading. Traders now have more optionality around how and when to trade whether they require immediacy via request for quote (RFQ) platforms or working anonymously over a longer intra-day timeframe via dedicated ETF execution algorithms. Fixed income ETFs have seen significant growth as investors have been drawn to the liquidity benefits of the ETF wrapper versus the underlying bond markets. For most buy-side desks, all ETF trading irrespective of asset class is undertaken by equity-specialist traders who have upskilled their understanding of the market forces and dynamics within other asset classes.

What innovation are you seeing in this space?

The ETF industry has been one of continuous innovation and that remains the case today. At the product level, we are seeing a rise in active ETFs, which not only offer more choice for current ETF users but should create opportunities for new investors to invest into ETFs and subsequently new trading opportunities for buy-side desks. We are also seeing solutions from the exchanges themselves such as exchange-based RFQs that utilise straight-through processing (STP) protocols all the way through to settlement, which improves efficiency and ultimately cost in the trading process. Alongside these developments at the exchange level, more dedicated ETF trading algorithms have been launched which empowers dealers with the ability to access this wider range of liquidity pools at differing urgency settings which alter the child-order placement logic, often within fair-value frameworks. Finally, there is also innovation at RFQ platforms with the automation of ETF execution via trader-customisable rules that allow quick and efficient trading of smaller tickets leaving the trader to concentrate on orders where they can add most value.

How are traders and market makers currently addressing liquidity fragmentation?

Traders are increasingly using the wider range of trading options within their toolkit as well as pushing for further ETF algo technology to bring together cross order book liquidity on an ETF and other proxy assets to provide liquidity on any single target listing. Alongside this, trading desks have been more open to adding new market makers to their risk-provision panels which leads to greater pricing competition and ultimately, improved trading outcomes. Market makers constantly search to improve efficiencies within their processes to better utilise their balance sheets to offer tighter pricing and/or greater liquidity. Market makers would also look to benefit from any harmonisation of trading venues and order books to bring their liquidity to a single point of execution. Additionally, making the post-trade fragmentation (central counterparty clearing and central securities depositories) more streamlined would allow market makers to commit more cash into the market, rather than having it tied up to satisfy post-trade provisions.

What new offerings are being developed to enhance liquidity and execution quality?

Aside from the developments mentioned previously, there are moves within the retail space to increase/improve the ability of platforms to offer more ETF trading to their clients. Technology firms are looking to help platform providers streamline the ETF process, reducing complexity where platforms may currently struggle due to legacy systems. There has also been an increase in ETF post-trade analytic capabilities for traders – either developed inhouse and/or utilising third party solutions that can offer detailed breakdowns of not only each trade itself but can provide information on changes of liquidity during the trading process such as price movement, reversion, or the widening of spreads. Finally, an efficient and well-implemented consolidated tape could help to complete the circle allowing greater transparency at the pre- and post-trade level generating greater confidence in ETF trading for all users of ETFs. 

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Axes have typically been used by traders looking to execute larger or block trades which they are not comfortable executing electronically. In this instance, axes are able to provide traders with an indication of which sell-side counterparty they should select.

The use of axes has also seen continued use in the fixed income space, with their use cases expected to continue to increase in the future.

“The ability to find a matching opposing side remains crucial in the many, less liquid areas within fixed income,” Lars Salmon, head of fixed income trading EMEA at Fidelity International, told The TRADE.

“Whether it is direct provision of axes by dealers, through specialised vendors or those who play a broader role in markets, or axe indications on trading platforms – in a world where markets are fragmented, dealer balance sheets light, settlement discipline likely to find further focus from regulators – and all of that resulting in challenged liquidity – the likelihood of strong execution results generally improves where inventory can be utilised.”

Elsewhere, in the credit markets, axes are particularly useful given that traders are typically executing larger orders where minimising market impact and information leakage is essential.

Over the years, buy-side use of axes has evolved significantly, with portfolio managers increasingly using them as well. Portfolio managers typically use axes to be more opportunistic and to ensure that when looking to send an order to the execution desk, it is something that has a realistic chance of being executed in the first place.

“There’s not much point trying to sell a bond if there are no bids out there and vice versa,” Byron Cooper-Fogarty, chief operating officer at Neptune Networks, told The TRADE.

“The axes also allow portfolio managers and the trading side to interact in a way that that finds the optimal bond to express their investment views.”

The most important aspect of axes is the information they provide around a counterparty, Cooper-Fogarty highlights, emphasising that the direction is key. “It’s really the counterparty, the direction, the size, but also an indication of value – be that spread or price as well – which are the most important things axes can provide,” he added.

“Historic axe data has started to become more important as well. Increasingly, what we’ve found is our buy-side clients are measuring their counterparties from the sell-side in terms of slippage or price improvement. Based on the historic axes, they can get a picture of reliability around axe data as well for each counterparty.”

The use of axes has seen continued growth in both the US and in Europe, as they become a larger part of the trading and investment process. Axes are no longer only being used on the trading desk, but also research and by portfolio managers.

“In terms of provision of axe data, accuracy (of size and level) is having a number of advantages in terms of pre-trade considerations, though less specific indications can also work, arguably helping to protect the liquidity providers that remain pivotal in the fixed income market structure,” noted Salmon.

“While a number of ideas with regards to the evolution of fixed income markets are based on bringing as many interests/axes together as possible, it is questionable whether the market structure can change drastically enough in the foreseeable future to significantly reduce the very material reliance on the current crop of market makers – mostly banks and some non-bank liquidity providers – and the way the majority of business is still being conducted.”

The post Is the use of axes set to usurp the status quo in fixed income? appeared first on The TRADE.

What are the most relevant structural changes you are seeing in the market at the moment, and how are you adapting your desk to meet these new challenges?

There is a lot to choose from here, so rather than highlighting one topic I think the focus should be on having a robust, adaptable approach towards change. The trading teams are very resilient – see the responses to Mifid II, the pandemic, and most recently issues in the banking sector – and it is about creating the environment to allow our traders to respond to the events. 

Important events shouldn’t happen around traders, they should be fully involved, so when we look at upcoming changes, be they market structure or new technologies, the team should be equipped to adapt to the new environment.   

How is the relationship between buy- and sell-side changing, and how can you best collaborate with your counterparties to gain insights and boost returns in times of market stress? 

There is so much data available to both the buy- and sell-side now that we are able to really focus in on areas that work, and others that perhaps need more attention. 

Liquidity is at such a premium in our markets that being able to articulate to the sell-side where to focus in order to maximise connectivity is really valuable. While the best relationships have always been collaborative, I would say the developments in analytic capabilities have certainly changed some of the conversations the buy- and sell-side have.

What challenges are you seeing given the current liquidity fragmentation, and what steps are you taking to meet them?

Our markets are complex to navigate, and traders must work diligently to locate unique liquidity situations. For us it not only comes down to working with our brokers to tailor their offerings, but also for our traders to understand the liquidity dynamics within our portfolios. 

Traders at Fidelity International proactively identify liquidity situations to our investors in names that we know they are watching, or that we feel may be interesting based on the characteristics of their funds. We are able to capture these situations and draw analytical insights into the value derived from a proactively generated order. With this data we can then encourage other investors to work with the trading team on execution strategies.

What’s on your radar for 2023, and what are your top priorities? 

We are focused on scale and efficiency, ensuring we have the tools necessary to adapt to evolving client needs. The focus therefore remains on technology and processes, to ensure we equip our people adequately to deliver for our clients.

The post Tom Stevenson: Scarce liquidity is changing relationships with the sell-side appeared first on The TRADE.

Gráinne

“Markets always interested me,” she told The TRADE. “I worked closely with the heads of equities on business planning, looking at new products and regions that could forecast client profitability, competitive market share, and a broad range of other initiatives. The firm was growing exponentially at the time, and I got great exposure working with some very smart people. But I decided I wanted a little bit more.” 

Laying the groundwork 

In 2005 she joined the program and electronic trading desk – which came as something of a baptism of fire. “There was a lot of very rigorous training, because you have to understand the fundamental dynamics covering global markets, so it was a really good grounding,” she explained. “Lehman was heavily investing in their technology product at the time, and leading the way in terms of pushing out electronic algos to become a top five player in that space, so it was a great time to join – just on the crest of that technology wave.” 

Covering a mix of hedge funds and institutional clients, O’Connor quickly learned that relationships were crucial, even as trading was becoming more automated. “I always made sure I had good cross-product relationships across the floor, and I became one of those relationship sales traders – you always want to ensure that a client has a good experience. That really helped me form a bond with my clients.” 

Timing is everything 

But, as we know, all was not well with Lehman Brothers – and in 2007, the cracks started to show, cracks that would eventually precipitate not only the decline of the bank itself, but the collapse of the whole house of cards in the form of the 2008 financial crisis. O’Connor, however, once again demonstrated her eye for the chance. “There were a lot of rumblings around the end of 2007 on the looming credit crisis in the sub-prime mortgage market, and we’d already seen the fall of Bear Sterns. As it happened, one of my main hedge fund clients had an opening in early 2008, which I interviewed for. I literally left the Lehman building for my new role, and the firm collapsed two weeks later!” 

As a trader with GLG Partners, where she spent the next five years, O’Connor learned what it was like on the other side of the street. Trading European and Asian equities for the long-short and long-only funds, she found that life on the buy-side was a very different experience. “The GLG family was quite unique, and traders were situated very centrally to the heads of the firm,” she explained. “Communication was absolutely key, and there was a lot of really genuine collaboration between traders, fund managers, risk managers – which I think is crucial for a successful business.”  

In 2014 she moved to BlueCrest Capital Management – another hedge fund, but a rather different (and perhaps slightly more fast-paced) kettle of fish, to help launch its equity product, before joining Fidelity International as a senior equities trader in 2018.  

“I saw the opening and thought – OK, I’ve done sell-side, I’ve done hedge funds, it would be quite nice to trade for longer term fundamental investors” she said.  

Life on the buy-side versus the sell-side brings its own unique challenges. At Fidelity: “We often receive huge orders relative to market volumes, with the average duration of a high touch order over three days. That’s where you need to have a really strong focus and the ability to sort blocks of stock to minimise transaction costs. The challenge can be immense sometimes, especially as we are faced with orders from the lower end of the market cap spectrum. It’s about patience and discipline.  We’re very successful at block crossing rates – given the tools we have at our disposal like conditionals, risk capital, and of course the relationships we’ve built with brokers over the years. 

But there are also universal similarities between buy-side and sell-side.  It was nice to be able to apply my sell-side experience to buy-side trading, when it came to trading large programs, understanding different strategies (risk and agency), market structure, usage of algorithms, as well as TCA to benchmark trades and counterparties. It felt natural to set the bar high with counterparties, but also work with new brokers on their electronic offering, partnering with them to enhance their algorithm settings to suit our flows.  

Again: “The same principles apply,” she explained. “We’re governed by best execution, and once that’s embedded, it doesn’t really matter what side of the table you’re sitting on.  I enjoyed the family culture of smaller firms and whilst at times trading can be challenging, there is a real buzz as you are sitting amongst the investment managers where you are the eyes and ears for market and trade opportunities which help contribute to investment manger’s alpha, which they love.  While there can be tears and sweat, it can often be a very bittersweet experience!” 

At Fidelity, O’Connor feels she has found her niche. “I have to say it is now the place where I really want to be,” she said. “It’s not quite as fast-paced, and that’s a huge difference compared to the hedge funds I had worked in previously,” explained O’Connor. “But once I became familiar with the style of the fundamental investment managers it all became very normal.   

She also believes she has been lucky to work with different types of investors. “Let’s face it, the market would be pretty boring not to mention more illiquid,  if we didn’t have a variety of  investor types (i.e., fast, real and retail money), as these make a market where investors can express a view, whether its short term, trending or fundamental, and let’s not forget, that each investor type is a liquidity provider/taker, and they all are integral for the market to operate efficiently.” 

Communication is key 

At Fidelity, she trades European and emerging markets focusing on financials, real estate and multi-asset. The team has five sector traders, one systematic trader and an order management analyst, lead by head of trading Tom Stevenson. Based in London, they cover markets across EMEA with a mix of both buy- and sell-side experience. Across the firm they work with over 80 fund managers from as far afield as Brazil, Toronto, continental Europe and Hong Kong, while Fidelity also has equity trading desks in Hong Kong to trade Asia Pacific and Toronto to trade North America, again making communication crucial.  

“There’s a lot of collaboration between the trading desks and with my trading counterparts, we talk a lot about what works in one region versus another. We all use the same systems, but we might all use them differently, so we hold continuous roundtables to discuss issues such as liquidity, automation and so on, and our approach to them. Those conversations and how we can leverage experience are absolutely vital to our success.” 

Even small things can make a big difference, when it comes to building those internal relationships. When O’Connor started at Fidelity in 2018, the traders and fund managers sat in different offices from each other, and sometimes even different buildings. “It felt quite segregated,” she said. “We’ve made significant communication enhancements since then – and in 2019 we moved to our new offices, with an open floor plan and, crucially, strategically located next to the tea station. That might sound silly, but it means everyone walks past you all the time and it gave us an opportunity to interact with the fund managers on a less formal basis, which makes all the difference when it comes to building relationships as well as chatting about liquidity opportunities, market soundings, and investment rational for particular orders.” 

Pace of progress 

On the trading floor, things can change fast. “When I first joined Fidelity, email was the main communication, which I found very strange and quite different – no one really used Bloomberg IB Chat, for example,” said O’Connor.  

But Covid and lockdown brought a lot of changes, both in terms of work-style and technology. “We now use communication channels like Teams as our primary method, and that’s made a big difference. We have a lot of PMs that are not based in the office, or even if they are they might be on client or company meetings or listening to client calls. So if we have a new order, or we want to show some liquidity opportunities, we can now get a pretty much instantaneous reply back from the PM as to whether they’re interested. 

“Essentially, I think the communication barriers have been totally demolished, and that has really helped PMs and traders work much better together. We can work more closely, we can keep them abreast of why names are moving in portfolios, we can advise them on positioning, on flows, look at trade cost analysis or how we can enhance execution. It really has built up the trust and those relationships have flourished as a result, PMs now feel really comfortable about coming to us to explain their thinking, their concerns. 

“Another aspect is how we can trade more efficiently to reduce my execution costs, and we have a lot of analytics available to us now, along with a great quant team and some really strong visual tools. So we can look at the results, and then work together with the PMs to see how we can place orders better, whether it’s about timing, sending down a block, reloading, using different execution methods, sourcing new liquidity opportunities, and so on.  

“The communication and collaboration with both the PMs and the analysts is crucial, but it’s also worth noting that they don’t always understand trading to the same degree as traders, so it’s also important from the perspective of being able to educate them so that they understand what we’re trying to achieve, which means that we’re all pulling in the same direction.” 

Panic stations 

The importance of these relationships was thrown into sharp relief with the advent of the Russia-Ukraine conflict earlier this year, which highlighted the strength of communication channels both within and outside the organisation.   

“We started hearing rumours around the invasion of Ukraine, so of course it was really important to keep our fund managers updated with feedback from local markets – it was a minute-by-minute situation where everyone was constantly assessing the probability of serious war, and unfortunately that became a reality pretty quickly. We were trying to risk manage our positions and we saw a lot of brokers start to pull down the shutters and stop trading local Russian and GDR equities, so we had to be bold and brave and seize the opportunities when we saw them, as well as ensuring our operational risk was covered. It was a pretty hairy few days and having a really tight team was key. As was, it must be said, being in the office – we were just coming out of lockdown at that point and of course the progression towards hybrid working has been largely positive, but in situations like that, you just can’t achieve what you need to unless you’re all in the same space together. 

“As much as anything else, it was needed in order to support the younger traders – a lot of them hadn’t really seen anything like that before, so it was important for the more experienced players to keep cool, keep a calm composure, and keep the conversation flowing around trading strategies, how best we should trade, who we should trade with. We had constant team huddles to ensure that trading was as effective and efficient as normal.” 

Trending technology 

Hand in hand with communication goes the tools not only to facilitate those conversations but to inform and execute their conclusions. “We have an ongoing dialogue around this, because technology is key to trading now – we streamline a lot of our flow and automate as much as we can through algo wheels so that we can focus on the less liquid names on the pad and concentrate on adding value and finding liquidity opportunities,” commented O’Connor. “We also find data really important, and we incorporate that into our technology initiatives like counterparty benchmarking, looking at IoI data, further streamlining our processes and so on. We work with good data to build detailed scorecards which benchmark our counterparties, so that we can work with them to improve service levels, which generally has more positive outcomes for everyone. 

“It’s all about improving performance. I come to my desk every day and sit down and ask myself: what can I do better? How can I generate that alpha? How can I trade more efficiently? How can I make decisions more effectively, how can I add scale, how can I factor size complexities into the equation? These are factors I think about constantly. Technology can help with this, but another key factor is the way I work with my external peers.” 

Building bridges 

Because just as important as internal relationships are the external bridges, particularly with regards to broker relationships.   

“Those relationships we had built up over time were instrumental in helping us deal with volatile situations.   The role of technology is essential in accessing venues electronically whether it is via electronic wheels, automated dark conditionals, periodic auctions…there seems to be a lot of innovation happening in the space.  The continuous fragmentation of venues in Europe adds to the complexities of trading which means liquidity is a huge issue, and while technology plays a key role, so too do our relationships with brokers. When it comes down to it the goal is just to figure out how to circumnavigate these issues.  

“Our broker list is crucial to help me do so. My pad is full of small and mid-cap tricky and illiquid orders so it is important for me to work with specialist brokers in that region or sector, whom I have built up a lot of trust with when it comes to sourcing the potential contra and understands what I want to achieve.” 

The importance of inclusion 

There’s no denying that it’s been a rough year. But building these relationships, both internal and external, are what have supported O’Connor, and Fidelity, through the storms.  

“The market is presenting so many challenges right now,” she said. “Whether its volatility, central banks curbing inflation, politics, regulation, the threat of recession – there are just so many things that impact what we do on a daily basis. But that’s also what makes this job exciting, because there is constant evolution.” 

Team culture is a priority for O’Connor, who is proud of how diverse her team is – especially in an industry not always known for its inclusivity. The eight-strong FIL equities team has three female traders, and boasts backgrounds from Goa, Sierra Leone, England and Ireland. “We had quite a moving day recently where we embraced World Culture day, took some time off the desk to share emotional stories of our backgrounds, experiences and journeys to where we are today.  We even had a bake-off to showcase regional foods,” she said. “While everyone had a unique story to tell, it became clear that our diversity is a large part of why we work so well as a team and it was so interesting to hear the struggle and sacrifice that our parents and grandparents made to ensure that some of us were the first of our generation to go to university, to become as successful as we are today.  It was really humbling. 

“There can be a lot of messaging that sometimes is missed, but people really resonate with personal stories and making these connections and getting to know each other also create a sense of inclusion and belonging. Collectively we will continue to push for diversity and inclusion within trading at industry events, through the Sustainable Trading network, mentoring schemes, promoting mental health awareness, and working with kids/students from under-represented backgrounds, among many other things. 

 “I want to be involved in pushing that change across the trading industry, and one of the most important ways I can do this is by championing the benefits of inclusion and diversity. Expanding our talent pools, promoting the inclusion of people from all different backgrounds. A lot of companies have their own policies, but how do we ensure that these are relevant to the trading desk itself?  

“A trader cannot aspire to be a great trader on their own. Working within a team, learning from your colleagues, networking both internally and externally, are all so important to build confidence and to grow your reputation – and ultimately, that improves the end result for everyone, including your clients.  

“This is a great industry that doesn’t always get the best press, but I feel so lucky to be a part of it. I look forward to working with the next generation of traders, and one of my top priorities is to be a mentor for junior traders, both on my own desk and across the market.” 

The post Meet Fidelity’s Gráinne O’Connor appeared first on The TRADE.

It’s been an appalling year for equities, with European stocks seeing their worst performance since 2018 and the STOXX 600 down 11.7% year-to-date. The US has fared even worse, with the S&P 500 losing 19.24% in 2022, while in emerging markets, the MSCI Asia-Pacific index (ex-Japan) is also down 19% for the year and in the UK, the FTSE 250 is on track to lose 21% for 2022. The MSCI All-Country World Index is on track for its worst year since the financial crisis, down 20.68% on the year.

A turning of the tide? 
However, despite almost inevitable recession in 2023, the tide of optimism would appear to be cautiously turning, based on the latest Wall Street predictions.  

In his 2023 outlook, JP Morgan global head of equity macro research, Dubravko Lakos-Bujas, noted: “In the first half of 2023, we expect the S&P 500 to re-test the lows of 2022 as the Fed overtightens into weaker fundamentals. This sell-off combined with disinflation, rising unemployment and declining corporate sentiment should be enough for the Fed to start signaling a pivot, pushing the S&P 500 to 4,200 by year-end 2023.” 

The bank also expects the convergence between the US and international markets to continue next year, both on a USD and local currency basis. “The S&P 500 risk-reward relative to other regions remains unattractive,” it said. “Continental European equities have a likely recession to negotiate and geopolitical tail risks, but the eurozone has never been this attractively priced versus the US.” 

A bullish outlook
In its investment outlook for 2023, tellingly titled ‘The Bull Case for Equities’, JP Morgan noted that: “While we are not calling the bottom for equity markets, we do think that the risk vs. reward for equities in 2023 has improved, given the declines in 2022. With quite a lot of bad news already factored in, we think that the potential for further downside is more limited than at the start of 2022. Importantly, the probability that stocks will be higher by the end of next year has increased sufficiently to make it our base case.” 

In its December 2022 equities outlook, Fidelity International also pointed out that: “Global equity markets posted back-to-back monthly gains [in November], amid modestly slowing inflation and a falling US dollar, with investors returning to stocks on hopes that policymakers will pivot sometime in 2023.” 

And in a December Bloomberg News survey, 71% of respondents (including some of the world’s biggest asset managers) expected equity markets to rise next year: as inflation looks to have peaked and with hopes of a shift in tone from the Fed in 2023 leading to lower rates.  

Baby steps
However, others are more cautious. In its own 2023 outlook, BlackRock warns that we may not have seen the full extent of the damage – and that either way, the ‘Great Moderation’ (the four-decade period of largely stable activity and inflation) is very definitely behind us. “Equity valuations don’t yet reflect the damage ahead, in our view. We will turn positive on equities when we think the damage is priced or our view of market risk sentiment changes. Yet we won’t see this as a prelude to another decade-long bull market in stocks and bonds,” it said.  

The asset manager is staying underweight on developed market (DM) equities for now, warning that a recession is not yet priced into earnings expectations, but says that it “stands ready” to turn more positive as valuations get closer to reflecting the economic damage. “We could see market risk sentiment improve in a way that would prod us to dial up our risk appetite. But we are not there yet,” said the firm.

It also currently remains in favour of bonds over stocks in the short-term: “Higher yields and strong balance sheets suggest to us investment grade credit may be better placed than equities to weather recessions,” it said.

However, over the longer-term, equities are still where it’s at. “We estimate the overall return of stocks will be greater than fixed-income assets over the coming decade,” believes BlackRock.  

Hotspots
Looking forward and emerging markets – Asia in particular – are looking to be a key growth area.  

“Our 2023 global macro outlook paints a much less daunting picture for equity markets, despite a slower overall GDP growth profile globally than in 2022,” said Jonathan Garner, chief Asia and emerging market equity strategist at Morgan Stanley, in a December podcast. “As Asia and Emerging Markets move from a year of major adjustment in 2022 towards a less daunting 2023, investors may want to change their approach for the beginning of a new bull market.” 

UK equities are also at the top of the list, with a recent survey from the Association of Investment Companies citing the UK as the top investment region for 2023.  

The post Could equities finally be on the up? Wall Street seems to think so… appeared first on The TRADE.

Tom Stevenson, head of equity trading EMEA, Fidelity International:

Thomas McHugh, CEO and co-founder, FINBOURNE Technology: In 2023, ESG is now the new normal. Investors expect asset managers to generate sustainable returns across multi-asset portfolios. They also expect not just a portion of these investments but the majority of their portfolio, to positively impact on the community and the environment. However, the current status quo of best endeavours approaches and heavily manual workflows, which many firms operate in, particularly in ESG investments and sustainable finance, needs to go. Together with spiralling, operating costs, this way of working poses a considerable risk to both reputation (greenwashing) and human capital (employee burnout). ESG is not an outlier or a problem in isolation. If anything, the ESG data challenge is the epitome of what is wrong with the capital markets infrastructure today. It is all the limitations stemming from a mainframe legacy, compounded into one investment area, that just so happens to have planet-saving consequences. From the aggregation of complex and diverse data sets, and the interpretation of non-standardised reporting frameworks, to a lack of entity-level granularity. And at the heart of it, the fundamental problem we are helping firms to make sense of – understanding and deriving value from their data. Interoperating with the existing systems landscape and giving firms the flexibility to migrate between data models is going to be the number one priority in 2023, if firms are to achieve the resiliency needed to manage climate-related risk, meet stricter ESG regulations, and investor-driven transparency. Importantly, by provisioning clean, interoperable data, firms can seek out emerging opportunities to deliver both meaningful change to our planet and returns to its inhabitants.

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Dominic Eccles has joined Fidelity International as an equities trader after spending the last two and a half years at Federated Hermes.

Previously in his career her spent four years at Woodford Investment Management as an equity trader and three years collectively across BP Investment Management and Legal & General Investment Management in investment operations roles.

Eccles was recognised as a Rising Star of Trading and Execution at Leaders in Trading in 2021, while Federated Hermes also won the coveted Trading Desk of the Year buy-side award the same year.

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FINBOURNE received a strategic investment from the venture capital business at Fidelity, known as Fidelity International Strategic Ventures, in a recent funding round with other undisclosed investors.

Fidelity will now adopt FINBOURNE’s LUSID platform, which the asset manager developed in partnership with the platform provider, HSBC Securities Services and hedge fund Atlana Wealth in 2018, to replace legacy in-house software and hardware data systems.

LUSID went live in 2019 with its cloud-based and API architecture to consolidate and simplify complex data controls and performance, allowing buy-side firms to pull their data from portfolios, custodians, fund administrators and prime brokers into a single platform.

“FINBOURNE’s unique platform offers the most complete integrated data solution in the market, while remaining fully open architecture,” said Alokik Advani, managing partner at Fidelity International Strategic Ventures. “We recognise the important role FINBOURNE will play in streamlining Fidelity’s own legacy data architecture today, as well as the growing opportunity it will provide for broader market participants right across the investment community.”

The investment and partnership with FINBOURNE follows recent news that Fidelity became the first asset manager to sign a FinTech pledge in the UK aimed at accelerating growth of the FinTech sector with standards for onboarding and partnerships.

As part of the pledge, Fidelity has committed to five principles including guidance for FinTech firms on the onboarding process, clarity on progress throughout onboarding, a named contact, good practice and improvement, and bi-annual feedback.

“We see FINBOURNE’s platform as complementary to our digital and cloud strategy at Fidelity as we focus on our core areas of un-bundling through the use of APIs and becoming a more data-driven organisation,” added Stuart Warner, head of technology at Fidelity International.

“In time, the platform will act as a central hub to design and create new capabilities that will seamlessly connect with FinTech’s and other service providers, which will enable us to service our clients in a completely new and innovative way.”   

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