The Big Interview: Rob Boardman

The TRADE speaks with CEO for ITG in EMEA, Rob Boardman, about the recent launch of its algo wheels, the systematic internaliser regime and the challenges ahead of MiFID II.

Hayley McDowell: How can firms use algo wheels for MiFID II compliance?

Rob Boardman: Some of the implications of the increased focus on conflicts of interest under MiFID II haven’t been as widely reported as unbundling, market structure or dark caps. I am referring to the more fundamental processes of who you do business with as an asset manager. On the trading side, there is a lot of scrutiny within asset management firms reviewing their compliance around choosing brokers. Regulators no longer accept the reasons often used in the past, instead they want solid evidence and proof.

ITG produced a new tool – known as algo wheel – to make sure the asset manager is sampling its broker randomly and fairly, giving each broker a reasonable amount of business across a variety of different market conditions. This also allows the asset manager to decide which brokers are better preforming, and therefore you can give more business to them. The algo wheel accomplishes that using proprietary technology we built in-house, but the most important part of that is the analytics around how you should allocate and select a broker. One of the things we find is that often the buy-side will pick a broker or strategy as a choice, when actually they should separate those two. A broker tends not to be as important as the strategy. The least important choice is the choice of venue, but by far the most important choice is the strategy. We have segregated those two and made asset managers think carefully about strategy, and once they have, we randomise their choice of broker.

This creates a new process to produce a lot of performance data which is fair and objective and so it gives an unbiased result. It also provides the answer to compliance, internal audit or even customers. That truly is best execution.

HM: A recent report named ITG, Bloomberg and Markit as having the most used TCA tools. What sets ITG’s TCA apart from its competitors?

RB:  All TCA tools have strengths and weaknesses, but I believe there are a few areas of ITG’s TCA tool that sets it apart from its competitors. In particular our clients heavily use the consulting side of the tool and many of them are taking analytics more seriously. Not just for trading desks, but compliance and even boards send analytics to trustees or funds. As a result of that, people want to make sure they have understood the data correctly and make changes from it. Alongside the technology platform, it’s important our clients can understand what the analytics means and what it can be used for.

Some of the biggest areas of improvement for asset management firms are portfolio managers releasing orders in ways which generate higher transaction costs, so it could also be used upstream of a trading desk. The ITG TCA tool also has a peer group service. If it was used without a peer group, clients would get a result explaining the cost of executing a trade and some would be left deciding whether this is a good or bad price. The peer group combines all of the results from managers in our community and we sample a very high percentage of institutional trading that occurs globally. The anonymous data is pooled together and users can see what it costs other participants to execute similar size orders. It tells market participants how they stack up against each other, which creates a much better statistic.

HM: What are the effects of MiFID II’s systematic internaliser (SI) regime on ITG’s business?

RB: When policy makers first came up with the idea of an SI, I think it was the notion of a liquidity provider who is willing to offer liquidity to a wider market. One thing regulators don’t want to see is SIs essentially repackaging liquidity that is already available on exchange. That doesn’t serve any purpose. But regulators must let SIs unwind risk and interconnect. It’s a delicate balance and I can see the regulator’s point. ESMA wants to see all SIs become true liquidity providers and not just intermediaries.

Under MiFID II, the removal of broker-crossing networks means there are likely to be fewer choices for banks to interact directly with investors away from exchange and MTFs. It doesn’t take a genius to figure out there are therefore likely going to be far more SIs than there have been previously, because there are fewer choices now. We could find quite a few SIs launched around the market but for different reasons. Some will retool their broker-crossing networks for another purpose, others will be to ensure compliance with trading obligations.

I think we might find there is a very large number of SIs, far more than regulators had ever thought. That means we will enter a period of market fragmentation. The SI providers will be courting clients and explaining the benefits of their SIs and I have no doubt there will be some value added by SIs. If there is a very large number of Sis, there’s a value in intelligently aggregating the liquidity and providing access in a smart way using analytics to decide which venues clients should access. ITG hopes to help people decide which SI they should be using and provide a level of protection, particularly for institutional investment managers. There are some technical differences about interacting with SI compared to an MTF or public market. They don’t have to treat all clients the same or have a public rulebook. So we are keen to provide this protection by finding out exactly how each SI works and providing the appropriate technology response. We want to make sure institutional investors aren’t taken advantage of.

HM: Which aspect of MiFID II is most problematic for ITG’s clients?

RB: The most difficult aspect for many of our clients is probably the research and unbundling, but that’s more systemic for their business. In terms of trading, many clients and the whole market have become used to having dark liquidity available as one tool amongst many. To see that constrained will mean many of the UK markets and a portion of the Euro stocks will be capped. That is a problem and the market will have retool. Part of the response ITG has taken is to apply for the large-in-scale waiver for POSIT, although this might not provide a complete solution if you’ve got small orders to execute. The market will find ways to adapt. For example, I think clients and brokers will likely find ways to put together larger trades, which benefit from the waiver.