SELL SIDE

The Big Interview: Philip Allison

CEO at KCG Europe, Philip Allison, speaks to The TRADE about the recent acquisition of Neonet, its strategic push into Europe and managing conflicts of interest as a market maker and agent…

By Hayley McDowell hayley.mcdowell@strategic-i.com October 12, 2016 9:20 AM GMT

In July this year, KCG announced it had agreed to buy Swedish broker Neonet as part of a strategy to push into Europe. CEO at KCG Europe, Philip Allison, spoke with The TRADE about the reasons behind the purchase and discusses what’s in store in the future for KCG…

Hayley McDowell: KCG recently acquired Neonet, what was the rationale behind the purchase?

Philip Allison: The acquisition of Neonet was a chance for KCG to accelerate its strategy in Europe which is to leverage our market leading technology to provide liquidity and best execution for clients. Looking at Neonet, it was an opportunity to invest in a company that has very similar values to KCG. They have a 20-year history and a real culture of execution quality by deploying technology, tailored and designed to help their clients. As a result of their long history in the European equities space, Neonet has very strong client relationships - particularly in the Nordic region - but across Europe. I felt it was a very natural, cultural fit.

From a Neonet client perspective, the acquisition allows us to offer a broader range of services than Neonet traditionally could. We are able to bring very deep liquidity to US equity markets, for example. From a KCG client perspective, we will deepen our liquidity in the Nordics while gaining additional technology talent to further enhance our offerings.

Technology is a huge focus for KCG on an on-going basis. The vast majority of people within KCG are technology literate and across all of our businesses, most of the work going on is about deploying technology with the right quantitative models, to provide better liquidity and a better execution quality for our clients.

HM: KCG has a big presence in the US wholesale space. Is this part of KCG’s strategy for Europe as well?

PA: Interestingly, in Europe the wholesale space is more mature than I think people are aware of and we are one of the leading players in this space at the moment. As a whole, the retail business is smaller in Europe than in the US for cultural reasons. Typically, there are less direct investors for European retail, but the needs of the retail clients are very similar across the two regions. Most importantly, you have to remember that every single order is potentially someone’s sole investment into a market that year. So, you need to be incredibly diligent on every execution. When we look at servicing that new client base, it’s about providing a tailored offering to exactly they what want.

For most clients in Europe, they have a need to trade their own domestic market, the rest of the European market and typically the US market. KCG has a very good ability to connect with its clients because we can handle this for them. For example, an Italian broker may not have traded the rest of Europe historically. So as they begin to expand their client offering, we can provide solutions for them. Those solutions take a variety of forms. We meet some of clients on the Equiduct Exchange, through the UK RSP model and also on the systematic internaliser - which is something we can see growing under MiFID II.

KCG is pleased about the focus on best execution under MiFID II. It’s a helpful catalyst for us to move our business forward in Europe and as a market maker, the systematic internaliser framework is a natural one for us to operate in. In general, we recognise the challenges for the industry as a whole, but we are constructive and believe MiFID II will improve execution quality for the end-client. We are setting up to be successful in that environment, rather than worrying about the challenges of it.

HM: The buy-side in Europe has historically been concerned about conflicts of interest with brokers who are both market makers and agents. How do you manage those concerns?

PA: I have a fundamental belief that to really know a market, you have to trade a market. That’s really the core of our DNA as an organisation. Anyone who has tried to be a market maker on a public exchange knows that the market is very good at keeping you honest. This means everyday we have real research and development in the market making side, which gives us insight into exactly how the market is changing. If there’s an exchange upgrade or a change in any part of how the market infrastructure is put together, we generally see that very quickly in the market making function.

It’s certainly a material conflict, which is why we are very focused on managing it carefully and diligently through a range of methods. Firstly, we are extremely transparent with our clients, secondly we have physical separations of people and technology systems. Finally, its entirely up to our clients as to whether they choose to  opt in to our market making liquidity - there is no pressure on them to do so and for some clients it may not be appropriate.  For others, the value of interacting with retail order flow which is often contra to institutional order flow, is a very attractive option.  Increasingly, the trend we see is that our clients appreciate the edge we give to them because of the edge we have obtained through our detailed understanding of how the markets actually work.

HM: What does the future hold for KCG?

PA: I am encouraged by the growth we have seen since I have joined the firm. In the near future, we believe the ETF space is ripe for rapid growth and we are investing heavily in the area as we believe it is uniquely well suited to a firm structured like KCG. Currently we are lead market makers in over 500 ETF products and 1200 ETF listings in Europe. As agent, principal, through our retail and franchise desk KCG touches every part of the ETF ecosystem. With regard to other asset classes, we continue to have great aspirations to do more.  In some areas, we need the market structure to help us, however. For example, we trade a lot of on-the-run US treasuries in both Europe and the US and with greater price transparency would expect our footprint to grow. In Europe, were MIFID II to create an opening in European government bonds we would certainly be keen to participate.

The one thing I have learnt, however, is that you cannot go faster than the market structure allows. To that extent we are watching and waiting now. With the equity asset class, we genuinely feel the MiFID II direction is becoming much clearer and we think systematic internalisers will be a key component of that. We will be very focused on that product offering to deliver the best liquidity we can for our clients.