Dealing with a difference
Francis So, head of trading at BNP Paribas FIN'AMS (Asia), explains how outsourcing the dealing function can help buy-side firms focus on their core business.
How does the Asia dealing desk fit into the wider structure of BNP Paribas Investment Partners?
Since the merger of Fortis Investment Management with BNP Paribas Investment Partners (BNPP IP), our Asia dealing operations have followed the same model used by our parent company in Paris. In short, dealing is not strictly part of the investment management group; it sits in a separate company called FIN'AMS, which is increasingly externally focused and has its own P&L.
This means we treat asset management firms within BNPP IP as clients; they are charged a fee for the trading services we provide, which is typically based on turnover, but this varies according to product range. The Asian dealing desk mainly deals on behalf of BNPP IP's Hong-Kong based portfolio managers, but we also trade for investment managers based around the world. Globally, all of FIN'AMS trading desks act as a single trading team whereby orders can be routed to the appropriate trading desk where the expertise lies or by having a 24-hour coverage as in the case of convertible bonds.
But for all intents and purposes, we are still considered the centralised dealing desk for our asset managers.
In Hong Kong, we have four traders, including myself, and we cover the whole Asia-Pacific region from Australia to North Asia right across to India. We cover 14 different markets in total and have on average 10-15 years of trading experience on the desk so we feel quite comfortable facing any kind of situation. Trading is split by geographic markets and although each trader has his/her own market expertise each of us are also able to handle any additional flows to meet market needs and conditions.
FIN'AMS now looks after the dealing needs of non- BNP Paribas entities in Paris. Could that model be extended to Asia too?
Yes. FIN'AMS was established as a separate company in Asia earlier this year and we are now in a position to offer our services as an outsourced dealing desk for asset managers. As part of this development, we now reside with BNP Paribas Securities Services within the custodian business due to the synergies between the two. Worldwide, our custodial group provides services such as settlement, custodial services, fund services, securities lending and now dealing services. We can provide the client with a one-stop solution to suit their needs. In all likelihood, we will rebrand/ change the name from FIN'AMS to reflect the nature of the business, i.e. Dealing Services.
Are existing service level agreements and reporting capabilities sufficiently robust to be transposed for use by external clients?
We have detailed service level agreements with our BNPP IP clients that can be leveraged for other clients as well. But beyond that, we have good informal lines of communication with our fund managers. To achieve the client's goals and objectives we discuss and work with them to determine an appropriate trading strategy. Within our service level agreements, we have a detailed best execution matrix where the fund managers can determine which benchmarks are best suited for them. They can use benchmarks such as arrival price and VWAP, and it's our job to outperform those benchmarks.
What are the target firms that you feel are most likely to want to outsource their dealing services, and what do you see as your unique selling points?
We target asset managers and firms that are establishing themselves in Asia for the first time or existing firms that are looking to reduce cost. The cost and process of setting up an Asian dealing desk is expensive when you consider all the human, technology and infrastructure resources that you need. From a cost perspective, they may wish to outsource that sort of business. Also an existing dealing desk in Asia, for example a Chinese qualified domestic institutional investor, may already have trading capabilities in Asia, but it may not make sense for them to set up in Europe too if they only have a limited amount of trades; it would be better to outsource such trades to us. Similarly, we can serve European clients that want to trade in Asia but don't want to set up the necessary infrastructure in the region. And because we trade across multiple asset classes – including fixed income and convertibles – a firm might want to outsource some of these types of trades to us while maintaining their own dealing desk in equities.
One of our unique selling points is the range of services we're able to provide to a client who is setting up or looking at areas to reduce cost. The dealing function/service is complementary to the outsourcing capabilities of BNP Paribas Securities Services for asset managers. The extent of services provided by this new set-up goes from dealing down to full middle- and back-office outsourcing, allowing fund managers to focus on the area where they will bring greater value to their clients, i.e. investment strategy and stock picking.
Why use FIN'AMS?
Increasing cost for asset management companies is a major reason. Secondly, we are broker-neutral and have a full suite of brokers. We are a dealing desk for the buyside. A new client may have limited capacity in terms of the brokers they can trade with, but using our network, we can connect them to many. We are not in competition with brokers and strongly believe in having partnerships with them.
Will you need to upscale in terms of adding technology or human resources to the desk or will that be determined by demand?
In terms of technology, we have a global order management system, an execution management system and other tools for fixed income that enables us to use different strategies such as program trading, algos and DMA. The technology is in place but we are always looking to improve and upgrade to ensure the dealing desk is able to adapt to changing market conditions.
How will the relationship work between an asset management firm's portfolio managers and their brokers when their order flow is being channelled through FIN'AMS?
The client keeps its existing contractual and daily relationships with its brokers. It does not change. Once the client determines the brokers they want FIN'AMS to trade with, we can determine how commissions are to paid to those specific brokers. Where a broker is able to provide best execution, we will always follow that best execution policy first but we will also need to refer back over time to the client's broker voting.
Increasingly trading is seen as an integral part of the investment process. How will you ensure a close relationship with portfolio managers at client asset management firms?
When a new client comes onboard I don't think it will be any different to working with existing PMs within BNPP IP, many of whom we have long working relationships with, stretching back to before the mergers of ABN AMRO into Fortis and then into BNPP IP. When we develop new relationships with clients, we expect to communicate regularly with the fund managers. Our goal is to add value to the client in various forms, such as providing market information, views and appropriate trading strategies.
Ultimately our objective is to acheive the best possible price based on the client's objectives.
In terms of benchmarking, if a portfolio manager chooses VWAP, does that leave you behind the curve?
It depends on the situation. We tend to use implementation shortfall as a primary benchmark. But if markets are quite volatile, it may make more sense to use a VWAP benchmark, rather than an implementation shortfall one, as the VWAP may give you a better price. It really depends on the situation. For example, we will look at the value of a stock relative to the index or the sector and discuss with portfolio managers to determine an appropriate strategy but we also adjust our strategy according to market conditions.
Some buy-side firms have responded to market volatility by using algos more and sales trading less. Has that been your approach?
Again, we respect clients' needs and wishes in terms of trading. But we propose to use the added values of our sales traders versus the algos. We rely on inputs from sales traders in different geographic locations where they are only focused on their local market. Local knowledge is an advantage and we make use of this to help us determine a strategy. If it is a volatile period, do you increase your participation rate while the index is going down, or do you choose a specific level that you are comfortable at, to complete your order or get as much volume as you can? That's the sort of question we ask.
To what extent do you trade in the dark?
Broker dark pools are valuable if they're providing liquidity. Markets in Asia are getting more and more fragmented. Even though spreads have narrowed, you get a lot more fragmentation so the use of dark pools to get liquidity is always a good thing.
What impact are market structure changes such as increases to trading hours or the growth of highfrequency trading (HFT) having on how you trade?
It hasn't made a huge difference to us but changes to market hours have been a burden to a lot of buyside traders. When you're not seeing increased turnover because of increase in hours, you find liquidity is just spread out more.
The majority of our volumes are focused on Hong Kong where the cost of trading restricts HFT firms. HFT can add liquidity, but we are cautious.
Focusing on Hong Kong, HKEx is very focused on enabling investment in China. What's your view of this strategy?
It's something we watch with interest. Currently our clients invest in A shares listed in Shanghai and Shenzhen for our Greater China Fund via our QFII status, but they also invest in H shares in Hong Kong for certain other global or regional funds.
HKEx is introducing many new products, such as ETFs and renminbidenominated stocks and I would expect to see more of these issued in Hong Kong in due course. HKEx is also increasing its spending on technology, but you have to contrast Hong Kong with Australia, where the threat of competition from Chi-X Australia has encouraged the Australian Securities Exchange to introduce mid-point matching and bring down the cost of trading. Hong Kong needs to become more competitive, learn from other exchanges and innovate.
What other issues are causing you most headaches from a trading perspective?
The biggest issues are liquidity and volatility in the markets, and how to achieve best execution for our clients. Our view of best execution can vary depending on the urgency of the trade. In periods of high volatility we try to remain cool headed and assess the situation, rather than following the herd instinct. Everyone on the desk has been through various market cycles. You just have to think through the issues and react accordingly.
Redefining the art of dealing
Francis So, head of trading, BNP Paribas FIN’AMS (Asia) has been with the firm since 2005, when it was still under the control of ABN AMRO.
Prior to joining BNPP Invesment Partners, So spent five years as head of trading for Asia at Baring Asset Management and has also worked as a senior trader at Fidelity and sales traded at Sun Hung Kai Securities.
BNPP IP first delegated its trading services to a specialised multi-asset class platform in 2007 after the introduction of the Markets in Financial Instruments Directive in Europe, with the aim of adding value to the trade execution process.
BNPP IP’s order collection and routing platform is conducted via BNP Paribas FIN’AMS, a fully-owned subsidiary of BNP Paribas Securities Services, which carries out executions on behalf of BNPP IPS’ investment management teams.
As well as being the main buy-side trading desk for BNPP IP, FIN’AMS is also used by external asset managers, with multi-asset class desks located in Europe (Paris, London), Asia (Hong-Kong) and the US (Boston).
The firm has six global dealing desks for fixed income comprising: credit, emerging, rates and derivatives, FX, money market and convertibles. The six desks employ 30 traders under the responsibility of Carl James, head of fixed income and FX trading, BNPP IP. There are three equity desks: low-touch, high-touch and delta one, which fall under the responsibility of Hubert Rotivel, head of equities.