In conversation with… Stuart Lawrence

Stuart Lawrence, head of UK equity trading at The TRADE’s 2022 winner of Trading Desk of the Year, UBS Asset Management, deep dives into navigating current market conditions and the shifting regulatory and market structure landscape with Annabel Smith.

What is your technology strategy?

Two years ago, we instigated an algo wheel and after that we began the process of automation. We built on our algo wheel infrastructure and created desks from which certain types of order flow would be automated. We call it “no touch”. The portfolio manager sends trades to the automation desk, which then sends them on to our EMS, where they are executed in a timely fashion based on the parameters we’ve set in the algo wheel. The only thing we need is one person on the desk to have eyes for kick outs in case anything hasn’t correctly submitted due to prescribed characteristics.

We started small with certain types of flow and as we go on we’re bolting on more and more. In terms of notional traded it’s a hugely growing part of our activity. Ultimately, though it is difficult to give an arbitrary number in terms of the number of orders automated, I’m aiming for 60%+, maybe even as high as 80%. Most of that will be made up from the passive side of the business. In terms of overall notional traded it will probably be less than that, by percent, because we will tend to execute the higher value orders ourselves using the experience of the trading team. The advantage of automation in my opinion is that it clears the “white noise” of low-notional orders where we can add no value so we can focus on those where we can. 

As a step further on from that, we’re working on clustering. Clustering is about looking at the characteristics of each individual stock in a more data-driven way. A stock could, for example, have certain momentum or volatility characteristics that can be observed. Each stock can be assigned to a group (or cluster) and that group can be traded in a way relevant to their attributes. This means orders are no longer limited to a one-size-fits-all wheel approach. There are some sell-side firms who offer this clustering information but we’ve chosen to use our own data because we’re trading for UBS AM not for the street. We know how our past orders have acted and therefore we should be using that to navigate what we do in the future with our algos. These are algo wheels 2.0. Most buy-side firms have an algo wheel and we all need to start thinking about the next stage of evolution.

Which market structure and regulatory changes are you most aware of?

For a very long time, the industry has had an exchange-centric model. However, in the last two to three years we’ve seen a move towards alternative venues and disruptors, primarily because of their innovation. For example, you have some ELPs now looking to quote directly into your EMS – firms like XTX are pushing very hard for that bilateral relationship. In the past you would reach them via a smart order router or a broker algo. If I’m dealing directly with one of the ELPs then they know who I am and my risk profile and can price accordingly (and probably more competitively) versus when I interact with them via an algo. We’re also seeing buy-side to buy-side options such as Appital. In addition, we also have some of the more traditional venues such as turquoise which have turned on their rebate again. The momentum is definitely with the innovators.  

Regarding regulation, we are seeing a divergence post-Brexit between the UK and EU. The UK is looking more pragmatically about where orders are executed and the EU will have to take note of this and adjust accordingly. It’s almost like the EU is waiting and watching. If the UK makes significant changes to Mifid II then the EU will either have to match the UK or find a way of blocking perceived advantages. We’ve got to pay a lot of attention in the near future to regulation as it increases the cost to the brokers. It’s also very onerous in terms of the information required.  We must also be mindful of what’s happening around T+1 settlement. Long term, this concept will probably expand to Europe and other major markets. I understand T+1 from a counterparty risk and credit risk perspective but there are other factors that we will have to consider in terms of increased settlement failure, as well as the implications for ETFs and FX flows. 

The most important topic for me is outages. Ironically, the Investment Association put out their recommendations on what should happen in outages the week that Nasdaq OMX went down and we lost four Closing Auctions. At a minimum, we need some standardisation of messaging from the exchanges but we should expect the development of a mechanism to circumvent these events. Outages are a second order consequence of a lack of regulatory coordination and planning in the EU.

How has the relationship between the buy- and sell-side evolved over the years?

The real change is with the low touch broker relationships. These don’t exist as they once did – it’s medium touch now. I expect a high level of service for our electronic orders, with our coverage adding value where they can. I’ve made that very clear in particular to our wheel brokers. There’s a lot of people who want the chance to be on our wheels and if brokers aren’t prepared to work for it then we move on. 

How has the trading experience been altered over the last few years in light of current market conditions?

During my 19 years of working prior to February 2020, there was always a strict understanding that no one in equity trading would ever be able to work from home.  Then, suddenly, the Covid pandemic hit and automatically the trading experience changed in terms of how we did things and how we interacted with brokers. Initially, during the early Covid months, with the periods of high volatility and where spreads widened, we saw people tend to trade in different ways than they had previously.

There was a clear increase in over the day trading, with traders trying to be as passive as humanly possible to cover themselves in case of intraday news flow. Liquidity sourcing became difficult primarily because some of the larger market makers were trying to reduce the risks for themselves through smaller risk sizes. From a UBS AM perspective, we didn’t really see this but it had a knock-on effect. Now, with a macro and geopolitical environment that remains challenging, we are seeing certain brokers succeeding because of how they have changed their models, while others have suffered because they haven’t adapted as quickly or innovated in this new market.  

How have you altered your strategies to mitigate these conditions?

Alongside the active managers, UBS AM has a sizeable passive index business that has grown exponentially in the last few years. The sheer makeup of our flow has altered due to this, so we’re having to factor that into our decision-making processes. From the active side, we’re definitely finding there’s a lot less natural business to interact with and instead we are using more risk, which isn’t always our preference. The larger banks can offer this through their CRBs but the smaller brokers often don’t have the balance sheets to do so. Therefore, the big banks are dominating and are consolidating their positions. That said, we are seeing some of the smaller firms innovating more than their larger rivals and this product improvement keeps them competitive. Also, as with our peers, we are continuing to use algorithms more as a percentage of our overall business, fuelled by the use of our algo wheels.