The relationship between banks and their clients has shifted in recent years as the advancement of technology has encouraged a broader range of firms to become more autonomous with how they execute smaller trades and less risk averse with larger ones.
Execution services desks and those that sit within them have therefore become increasingly chameleon-like in their existence, constantly trimming their sails and tailoring their approach to execution depending on the changing tides of the industry.
For Europe, the advancement of technology is not the only narrative that’s reshaping the market as stagnant volumes and liquidity also continue to redefine who is capable of sitting at the top of the financial food chain.
The players that now dominate in the EMEA equities space are typically larger and have roots that stretch across the Atlantic due to tricky market conditions that have made economies of scale and the ability to internalise risk increasingly essential. Among them is Goldman Sachs.
“If I look at who the biggest players in the European markets were 10 years ago it’s very different to who they are today,” says Bobby Molavi, head of EMEA execution services and European primary distribution for equity capital markets at Goldman Sachs.
Molavi helms one of the largest execution desks across the street with execution services spanning low and high touch, emerging markets, multi-asset and quantitative services.
“The US banks have grown in market share and importance and we’ve seen some changes amongst the regional players over that period,” adds Molavi. “We’ve seen market share consolidate to fewer players and I think we’ve been a big beneficiary of that theme.”
However, even for an institution like Goldman Sachs, equities has become a tough business to excel in. Much like many of its rivals, initial investment banking revenues from this year were curbed by difficulties in the asset class. Goldman Sachs’ equities revenues globally had fallen from $3.24 billion in the first quarter of last year to $3.01 billion in the first three months of this year.
An increasingly fragmented Europe
Markets globally have seen a shift away from lit trading on primary exchanges to a variety of different venues. Europe now has the highest number of trading venue options of any continent around the world, totalling an eyewatering 70 exchanges, multilateral trading facilities (MTFs) and platforms that make up a complex web for participants to navigate.
In light of this shift, regulators in the Bloc are currently in the process of redesigning Mifid II as part of the Trilogue process, with amendments that span across dark pools, systematic internalisers (SI) and a consolidated tape.
Understanding this increasingly complex tapestry is a top priority for chief operating officer for EMEA equity execution services, Eleanor Beasley, particularly with how it relates to cost for the end client. However, for her, the focus needs to be on growth initiatives to boost liquidity in Europe.
“If liquidity is reduced, everybody is focused on the same amount of volume and trying to keep their businesses profitable and viable,” says Beasley. “Until we get growth initiatives really gaining momentum, it’s just further fragmenting the liquidity that we’ve got.”
The existing complexity in Europe has only been intensified by Brexit and subsequent regulatory divergence with the UK, and now the prospect of a shift to T+1 looks set to add to this further. It is now an essential part of client service on the sell-side having someone who can understand and explain to the client the cost and operations implications around market structure.
“That’s a huge focus from our client’s perspective as well understanding the exchange profiles, understanding what’s happening front to back between operations and understanding the settlement process. It’s a real front to back focus,” says Beasley.
“When T+1 goes live in the US next year we’ll have to think about the liquidity implications on potential products here. We’ll have to think about operational processes for us and our clients and then over and above that what happens when potentially the UK and Europe moves.”
Technology, particularly the use of a smart order router (SOR), has become more and more essential in light of this increased fragmentation and complexity. Goldman’s smart order router (SOR), for example, connects to around 27 electronic liquidity provider (ELP) streams.
“Due to the current market fragmentation and increased venue complexity, an execution platform not only requires venue connectivity, but speed and intelligent routing is key to effective liquidity capture,” says Goldman Sachs’ Alex Harman, co- head of EMEA equity electronic trading and head of EMEA program sales trading.
“If you think about how we’ve gone from 20 venues in Mifid I versus today where we have over 70 more complex liquidity sources including SI streams and periodic auctions etc., a smart router is one of the most important components on any platform today.”
New clients with new interests
A key development from the last decade not limited to the EMEA equities market is the evolution of the types of firms trading and what it is that they’re looking to execute.
“If you go back traditionally it was a very actively managed investor base and now it’s a combination of active and passive,” says Molavi. “We’ve seen the growth in hedge funds, we’ve seen the emergence of quant and systematic.”
This ever-expanding client base is also constantly looking to new areas for growth, whether that be new instruments or new markets. New regional focuses in particular have seen heightened interest from clients in light of ongoing macro events such as the invasion of Ukraine and the subsequent restrictions on trading Russian securities globally.
“Russia’s invasion of Ukraine and the subsequent removal of Russia from indices like MSCI last year has resulted in GEM [growth and emerging markets] investors’ focus pivoting to the Middle East,” says Sara Nielson, head of emerging market equity sales and sales trading for EMEA.
The bank made a renewed push into the emerging markets space in 2018 in the midst of the retreat of several other banking players from the space and the inclusion of Saudi Arabia on the MSCI index in 2019.
“We saw an opportunity where the market landscape had shifted around 2018,” adds Nielson. “Some of the European banks which had emerging market equities as a peripheral business retreated between 2017-2019 period and as a result there was market share up for grabs. This coincided nicely with the upcoming MSCI Saudi inclusion event in 2019 and so as we restructured and committed resources to the business we focused on that key event.”
Emerging markets is of particular interest to one of Goldman Sachs’ slightly newer client bases – quantitative and systematic firms. The bank made a push into the quant space in 2014 and now services a variety of firms ranging from standalone systematic hedge funds, funds that sit within platforms or funds that exist as proprietary broker dealers.
The services that they require differ from those required by the traditional long only client base looked after by Goldman Sachs. When it comes to algos, VWAP is most dominant in the quantitative space.
“Products are focused on a number of specific initiatives, mainly around low latency infrastructure, co-location, accelerated hardware or FPGA and sponsored access,” says David Cornish, head of quant services distribution and co-head of electronic equities for EMEA at Goldman Sachs.
“EM is definitely a playground that the systematic clients are looking to get closer to. We’ve seen it over the last half decade in China, more recently in Brazil. Saudi and MENA [Middle East and North Africa] is one of the things we’re really excited about. There’s a handful of systematic clients trading in Saudi today. In the next 12-18 months, every major quant will be active in Saudi that isn’t today. That will be either from London or the Tadawul co-lo.”
“Not many of these firms are young. They’re all fairly well established. All of them are looking for new opportunities. They’re well established in their core markets, how does that then evolve? One aspect has been geographical and others are new asset classes. It gets fairly varied. If they’ve been successful in say developed market Europe, or EM markets like China, then why not Saudi?”
The great channel shift
Perhaps the most poignant evolution to have taken place in the execution space in the last few years is the shift of client demand from the high touch channel to low touch. As technology and data sets have become more advanced and mainstream, clients have become more confident in allowing low risk and smaller sized single stocks flow to go through electronic and increasingly automated channels. Algo wheels have seen a rapid rise to fame in the last few years, removing human bias of execution and broker selection and allowing for better measurement of execution performance.
“How people transacted 10 years ago is very different how they transact today, with more block trading, more index tracking and market on close trading as well as more general utilisation of low touch,” explains Molavi. “Those themes could continue to change depending on liquidity and volatility.”
Around 72% of what Goldman trades per day in notional is now accounted for by the low touch channel with the roughly 28% left accounted for by high touch and program trading. However, while some might think increased automation leaves those working in execution with a welcome break to go and get a cup of tea, those people would be wrong.
“Will it [execution] become zero touch where no one looks at orders?” says Harman. “No, I don’t think that will happen for the client’s comfort and also ours. However, I do think we’ll see a growth in automation of alerting and the ability to self-serve in the future.”
All the while, what clients expect from a low touch service is becoming increasingly complex, evolving from simple direct market access (DMA) connection to crossing opportunities across the floor.
As low touch channels have advanced, buy-side clients have become increasingly comfortable taking on more risk. The buy-side are increasingly moving away from simply wanting agency execution to achieve their benchmarks, adds Harman.
“As the liquidity landscape evolves, as do the requirements of our clients for them to capture liquidity,” he says. “That’s where we are well positioned, via offering agency solutions and in addition various principal products across all execution channels, such as systematic GMOC, average price stops and the recently launched DTC stealth product.”
In light of the evolving demands of its client base, the Goldman Sachs team has been expanding the remit of its low touch capabilities including the building out of its suite of algorithms on its equity trading platform ATLAS.
“From the beginning of this year, we’ve started to migrate nearly all of our clients on to the three most popular algorithm strategies in our suite. The rest will come through the rest of this year now we have the building blocks,” says Harman.
Those three strategies account for over 50% of the desk’s volume per day in algorithms and include the bank’s new liquidity seeking algo, Sonar, a dark liquidity seeking algo, Sonar Dark and VWAP. The rest of the suite are derivatives of these three. Embedded in its Sonar strategy is a new Dynamic Close Scaling perimeter designed to capture more liquidity in the closing auction and DTC Stealth – a new solution aimed at internalising orders before they touch the street.
A single point of contact
Despite clients expecting a broader range of services, they typically do not want more than a handful of points of contact, the execution services team unanimously confirmed.
“A coverage person within GSET is not just versed in trading and markets and risk. They’re versed in stock loan and locates and swap restrictions and synthetic booking and cross currency and EM market microstructure,” says Cornish.
“It’s incredibly broad because ultimately clients don’t want to come in and talk to five different contacts. The person that can be a central point and is able to manage that dialogue as sufficiently as possible is the person who gets the phone call.”
From this snowballing trend the bank’s multi asset platform sales (MAPS) business was born. The business services clients across multiple channels in order to streamline the working relationship with clients. Individuals within the MAPS team have minors and majors in terms of specialist knowledge.
“The multi asset platform sales business is a coverage model that we created in order to service clients who are looking to centralise their touchpoints at the firm. This coverage model gives clients the control of deciding how they access the different services on the floor across execution channels and products,” says Kene Eijkeme, head of multi-asset platform sales and high touch execution for EMEA at Goldman Sachs.
Goldman like many of its competitors is constantly having to recalibrate the way it services its clients to ensure it is meeting their shifting needs. With the current macro backdrop becoming increasingly stormy and impacting client behaviours and with a rich tapestry of regulatory change to unpack on the horizon, this job will likely not become any easier any time soon.