Hayley McDowell: Dash currently has significant market share in US options, but how are you targeting growth in the US equities market?
Peter Maragos: We’ve always had a strong equity product – our platform has been multi-asset since the beginning – and though options was where the most opportunities were for us early on the key themes of performance, transparency and configurability, with a superior customer service overlay, are the same.
With that said, the market structure and the trends in equities has been very different from the options business. But the change in the equities market has certainly become more rapid, and we’ve seen it with the shift from active to passive, the emergence of quant investing, as well as an increased focus on best execution that has been brought about by MiFID II in Europe. It’s that heightened focus on best execution and the need for performance has really shifted the equities environment to hit our sweet spot.
HM: MiFID II has had a global impact. As a US-based agency execution firm, how has the regulation impacted Dash and its clients?
PM: For us, I would say MiFID II has had a global impact. A lot of the hedge funds and asset managers are global institutions and they’re not going to have different standards for different geographies. In this environment, the highest standards are going to be what’s used across the spectrum. You can’t have higher standards in the US than in the UK for instance, so there has been a trickle down in other geographies in terms of how buy-side firms are looking at their business and what they are focused on.
Clients are more focused than ever on best execution, performance and configurability because of MiFID II. Because a lot of the institutional community is global, these are the things that are top of mind for virtually all buy-side firms in the US, which fits our model perfectly
HM: As an advocator of full order routing transparency, how important is it for your clients to have a full view of where orders are being sent?
PM: Transparency around order routing has become more and more important to the buy-side. Even outside of our industry, we have seen heightened sensitivity in how personal data is being shared and used on the internet, for example, and people want to be aware of what’s going on. But this is happening in the institutional trading industry for a myriad of reasons. A fully transparent model gives people the ability to understand what’s happening in a way that they can trust, knowing for sure that when an algorithm is essentially shopping for them, it is doing so in the most effective manner, hitting the right venues at the right time. And transparency also helps ensure that the algo is not leaving anything on the table, so to speak.
The fact that clients can then take this feedback and then further optimise their strategies is also a powerful outlet for people that provides choice. For example, clients can say “with these types of orders I want to use these specific dark pools, or I want to go to these venues first, or let’s try to find hidden liquidity with a bit more finesse.” Ultimately, transparency enables understanding, and understanding enables clients to provide feedback that lets us precisely configure their strategies and get the very best experience possible when they’re out there investing on behalf of their clients.
From day one at Dash, whatever happens inside our “box”, so to speak, clients are able to analyse it through our visualisation technology, Dash360. Clients can drill down into a parent order’s slices and view the analytics on performance and slippage and so on. Users can literally watch an animation on what the router algorithm did with their order; where it went, why it went there and what the market looked like at the microsecond level. It’s important information that gives them full colour of not just what was going on in the routing engine, but also what’s going on in the market both before and after that order is completed.
I think when people can see something with their eyes, it can have a very different outcome from reading rows of data on spreadsheet. It really visualises the order lifecycle and allow clients to analyse it in a very succinct and clever way, which truly resonates with people.
HM: How would you solve the maker-taker fee and rebates debate in the US?
PM: With the rebate issue, I think we’re seeing attempts to treat the symptom, rather than cure the disease. Reg NMS is 12 years old now, and at the time it was implemented there was essentially two exchanges on the equity side that were doing all of the volume, so there wasn’t any real competition. We’ve gone from that duopoly in the early 2000s to 2018 where the equity market is, I would say, hyper-competitive with over 40 trading venues.
The rebate debate misses the mark because there’s nothing inherently wrong with rebates. Say a client is trading a passive strategy, for example — the rebates that trade incurs should be passed on to the client, which is what we do here at Dash because clients typically want to take advantage of those fee structures through the “cost-plus” pricing model we offer. But I agree that with all-in pricing there’s the potential for conflict of interest.
The electronic execution landscape is a very competitive business, with a lot of highly advanced solutions out there. I don’t think that we should ban rebates because of a potential conflict of interest, because clients are very savvy about who they use and why they use them to ensure they get the best result for their customers. I think we need to regulate conflicts of interest outside of rebates, and you could do this through order routing disclosures, which the Securities and Exchange Commission (SEC) attempted to do through Rule 606 reporting.
The buy-side is really very savvy; some of the smartest people I’ve met work on the buy-side, and I think they tend to vote with their order flow when it comes to these things. So I don’t think we need to change our market structure to alleviate any potential conflict of interest because clients can do that on their own. I do think that Reg NMS and the Protected Quote rules have created an environment with massive fragmentation that’s primarily benefited the exchanges.
In my opinion that’s what’s also led to the massive increase in market data fees, but the exchanges are optimising for their shareholders to whom they have a fiduciary responsibility. For a healthy market you need all participants in the ecosystem to be strong – exchanges, brokers and investors. But most important is the health of the investors, and I worry at times that we are losing sight of that.