The Compounding Benefits of Continuous Improvement

By 2010, no British cyclist had ever won the Tour de France, but Sir Dave Brailsford the new general manager of Team Sky cycling team believed that he could take a UK team to victory, possibly in five years.

Remarkably, it took the team only three years for Bradley Wiggins to claim the yellow jersey. The same year, British cyclists dominated the Olympic Games, winning the lion’s share of gold medals in cycling events.

Credit for the turnaround goes famously to Brailsford’s belief in the “aggregation of marginal gains”, the cumulative effect of small gains across many factors affecting performance to lead a breakout improvement.

He told his team to look for the “one per cent margin for improvement in everything you do.” This meant scrutinising scores of factors, from the ergonomics of bike seats to cyclists’ nutrition and exercise regimes.

A similar commitment to continuous improvement forms part of our DNA at UBS Direct Execution. We work alongside clients daily around the world to identify opportunities to make adjustments across myriad factors to influencing the quality of their execution.

This iterative, dynamic process is critical to navigating today’s rapidly evolving global markets. As adoption of electronic trading grows, competition among market participants intensifies. Regulatory changes continue to reshape the differing market microstructures in every region, and shifting macro-economic forces redirect global liquidity flows.

We draw on the combination of our global expertise and detailed knowledge of regional local market microstructures to give clients an edge in their drive for quality execution. Based on our team’s analysis and research, we implement scores of ‘marginal gain’ adjustments every year designed to keep targeting improved performance for our clients.

The payoff comes in many forms. One significant example is our ability to provide enhanced protection for clients seeking to interact with higher quality liquidity in dark venues while minimising information leakage.

Rather than use a static fill size for orders, clients rely on UBS’s continuous monitoring and analysis of the level of reversion pre and post trade to adjust the size. The result is a dynamic picture of the quality of liquidity captured, information that is used to set the appropriate minimum fill size for every child order sent to a dark venue from algorithms.

On other fronts, in the US and Canada, we recently enhanced our market close participation protocol to allow modification of strategies once an order is locked in the closing auction. These changes allow a broader base of algorithms to participate and potentially capture increased liquidity opportunities in the closing auctions.

A host of other adjustments have been made to address regulatory and market structure changes, including market access checks, small order trades and expanded use of conditional orders.

Our ongoing analysis of market microstructure has highlighted opportunities to optimise outcomes for clients, often through enhancements to basic strategies. For certain Latin American markets, a refinement of our block detection logic proved effective in managing the impact of large crosses on the behavior of certain algorithms.

In Europe, we have seen benefits in execution quality from changes identified through our analysis of the optimal amount of daily volume needed to generate the best prediction of the day’s ADV, a key factor when using VWAP.

This analysis led to a beneficial refinement of the calculations used to feed algorithms.

ASEAN markets are a telling example of the importance of combining global market knowledge with insights into regional microstructure. The Singapore, Malaysia, Thailand and Indonesia markets are characterised by wide-spread, long-queue stocks. This contrasts with the market structure in other APAC countries such as Australia, Japan and India – markets where long queue names are uncommon.

This difference helps explain why algos developed for markets like the US and Japan can sometimes perform quite differently in ASEAN markets. In these wide-spread, long-queue markets, layering the order book “intelligently” becomes critical to performance.

Lately, our team have had significant uptake in our UBS Swoop algo in a key ASEAN market because it can identify liquidity conditions on per-stock, per-time basis. Our team started using UBS Swoop’s underlying models to place orders on the passive side of the book for UBS algos such as VWAP and Tap. With this order layering approach, our VWAP algo performance has shown a significant improvement, hastening plans to implement this technique in other ASEAN markets.

Our program of constant fine-tuning enhancement is made possible by several factors. Fundamental is the UBS commitment to substantial, continuing support from the full team across the globe.

Equally important is the quality and openness of the dialog we maintain with clients. Our approach reflects our commitment to transparency in our work with our clients, which includes many of the world’s leading global institutions.

A final factor is the commitment to excellence that our team shares with our clients. In a 2011 interview with Cycling Weekly magazine, Dave Brailsford was asked what type of person thrives on his teams.

“People who are open, honest, people who have passion,” Brailsford answered. “You can write as many mission statements as you like, but what you want are people who are on a mission.”
This advertorial was written by Laurent Combalot and Mark Holder, UBS Global Heads of Direction Execution, and was originally published in The TRADE Q1 2015.