Finnish asset management firm Pohjola Asset Management (PAM) has teamed with agency broker and software vendor ITG to launch a smart order router that is unconflicted by brokers’ commercial motives.
The joint project led to the creation of Pohjola Asset Management Execution Services (PAMES), a wholly-owned subsidiary of PAM, and required ITG to reconstruct its order routing and connectivity software in a new purpose-built low-latency data centre in Stockholm. Pohjola adapted ITG’s core SOR technology so that the final offering was tailored to its requirements.
“The logic used in broker SORs includes the need for the sell-side to create value for themselves from client orders,” said Simo Puhakka, head of trading at PAM, responsible for €35 billion worth of assets under management as of March 2011. “This is not the case for our router, which does not look at trading venue fees and is not conflicted by ownership of alternative trading venues and other factors that may influence where brokers route client flow.”
“The new infrastructure combined with PAM’s customised routing logic and analysis has produced significant advances in benchmark performance for PAM,” added ITG Europe CEO Rob Boardman.
Speaking to The TRADE in Q2 2011 when the PAMES router was only in use at Pohjola, Puhakka said his firm’s implementation shortfall costs for European equity orders traded between June 2009 and December 2010 had been reduced to around 17 basis points, compared to 30-40 bps for trades routed via risk brokers and between 25-30 bps for orders sent via agency broker SORs.
The solution is now available for use by other institutional investment managers and PAM has reported that the first third-party client has gone live with the system. Puhakka says that a further four or five asset management firms will begin using the execution platform in the coming weeks.
By offering the SOR to other buy-side firms, PAM hopes to broaden the data set used by the router to make trading decisions.
“We want to develop the service with like-minded firms and we would like to establish a user group that meets a few times a year to share data and talk about how to improve the service,” added Puhakka. “We send around 80% of our trades through the SOR but we need more flow from different markets and different types of buy-side firms to help advance the SOR.”
Third-party users of PAMES will be able to tailor the routing profile of the solution to suit their trading needs, e.g. by choosing which venues that wish to trade on. The router is accessible via most execution management systems, with ITG listed as the buy-side firm’s counterparty. ITG’s execution algorithms are also available via the routing platform.
Liquidity fragmentation in the Nordic region has increased in the last 12 months but is not yet as pronounced as certain other European markets, with close to 70% of trading in Sweden, Finland and Denmark still taking place on the domestic exchanges operated by Nasdaq OMX Nordic.
However, Puhakka notes that Nordic asset managers are beginning to pay more attention to alternative venues, particularly in Denmark and Sweden where recent regulatory guidance that the use of commission sharing agreements (CSAs) will not be subject to additional taxes.
“The buy-side has been wary of the tax consequences associated with using CSAs, which may have slowed the amount of trading done on alternative venues,” said Puhakka. “Now there has been clarity on this by regulators, there could be greater use of multilateral trading facilities for best execution purposes in the Nordic region.”