Governance might grab the headlines, but it matters when you commit to marginal gains

We’ve written before about our application of ‘marginal gain’ continuous adjustments to target an improved performance for our clients.

But what’s the governance process that underpins those marginal gains, and why does it matter?

The dynamic nature of liquidity and the evolution of global market structures (whether through regulation such as MiFID II or innovation such as China’s Stock Connect) mean it’s critical to have systems and processes in place to target a continuous improvement in products and service for the benefit of our clients.

As an early pioneer of electronic trading, UBS has for some time recognized the importance of sharing best practices across global teams. What we learn in one region in response to a micro structure change, for example, is often tested and deployed elsewhere.

We believe our global governance process and structured approach benefits clients in the following three ways:

1. Liquidity strategy, best execution and reversion analysis – UBS sales traders, quants, market structure specialists and sales staff from our global locations assess each month the latest information on trade execution outcomes in an effort to target best execution for our clients. By looking closely at the reversion analysis of trading venues, including UBS pools and matching services, we can provide clients with data-driven observations on the types and characteristics of liquidity available. Our activities also provide valuable insights into the effectiveness of different algorithmic strategies under an array of market conditions and parameters. To assess liquidity trends, UBS teams review statistics on post-trade reversion in dark venues. In very simple terms, reversion measures the initial price impact of trades and how long that impact persists after the trade has been executed. We closely monitor the level of price reversion observed pre- and post-execution for dark pools we access. This analysis gives us a picture of the quality of liquidity captured. This input is used by our experienced traders and quants to determine minimum fill sizes for child orders sent to a dark pool by our algorithms. Reversion data also forms the basis for decisions on accessing specific segments of available liquidity. Minimum fill size is an important control feature; it optimizes the benefits of a fill against the downsides of information dispersion. Increasing fill sizes can help, but that approach also may limit the volume available for interactions, so there is a good balance to be found through professional judgment.

2 Market structure expertise – We monitor regulatory developments and practices across local and regional markets to give clients a global view of market structure trends. For example, UBS recently hosted a briefing for more than 100 clients at our Hong Kong office featuring UBS market structure experts from the EU, US and APAC. The briefing fostered an in-depth discussion on the ways different regulations affect market access, trading strategies and best execution responsibilities. The conversations ranged from a detailed look at proposed rules and compliance challenges across the regions, to views on trends in market structure and liquidity across trading venues. We offer these briefings across all geographies and look to include a local and global perspective whenever possible. Our “on-the-ground presence” as a registered broker in key markets provides us with unique insights. Because of our local presence and frequent interactions with regulators, policy makers, and key institutions, we stay abreast of emerging concerns and the direction of future initiatives. These combined efforts put UBS in a strong position to anticipate market structure changes and make timely updates to our algorithms and workflows.

3. Innovative client education – Demonstrating a deep understanding of broker algorithms and which ones to deploy to meet your trading objectives is becoming increasingly important. UBS offers training and briefings geared to the local requirements of clients in a range of locations. For instance, we make available for client use computer-based training tools with interactive information on UBS algorithms and different ways they can be deployed in a range of trading situations. Our outreach also includes on-site visits to discuss customizations of algorithms for specific situations and to share findings useful in optimizing trading outcomes.

Continued improvement – what’s coming next?

Given the increasing focus on execution quality, we are spending more time talking with clients about how our smart order router works and how to measure the transaction costs associated with routing decisions. We welcome open dialogue with clients on issues of importance, and we pride ourselves on timely interactions as part of our execution consultancy service. These discussions go beyond self-directed algorithmic orders and also address how orders worked by the PT desk and traditional sales traders are executed. In addition, we expect to launch a new and enhanced strategic TCA product later this year to provide clients with real-time access to TCA information across cash equity, futures, options and FX asset classes, inclusive of all execution channels.

To build and maintain momentum you need a clear vison of what success looks like for clients, a structured range of inputs to measure, and an experienced team who know how to apply enhancements.

By Laurent Combalot and Mark Holder, UBS Global Heads of Direct Execution