Kaustuv Dasgupta delved into his opinions on sourcing better liquidity in foreign exchange emerging markets with ‘trust’ and a recognition of the importance of human-to-human interaction as key parts of the process from his perspective.
He explained that while data is of course essential there is no substitute for these interactions between counterparties and is something that goes both ways and ultimately leads to more fruitful interactions.
“Once you establish that trust, you don’t need eight or nine or whatever number of dealers in your panel at any given point of time, because you can trust your process and you can trust the counterparty to put their best foot forward in pricing.”
In terms of the challenging task of managing and extracting liquidity in emerging markets, Dasgupta explained that his desk has found that the traditional approach to dealer selection – effectively going out to a very wide selection – is not the most optimal.
“For us we take a very quantitative approach to dealer selection. Typically, what we do is we use the data that we have from our execution to inform the optimal selection of dealers. We’ve found that three to four is around the optimal number.
Perhaps a slightly lower number than expected, as moderator Allan Guild of Hilltop Walk Consulting was quick to point out, however from Dasgupta’s perspective “beyond that, your market information leakage is disproportionate to the improvement in your pricing.”
When asked about the transparency aspect in terms of the dealer review process, Dasgupta explained that the business has adopted an approach which includes quarterly reviews with dealers and works to create a very quantitative scorecard.
“I think transparency is very helpful and the fact that we are quantitative in our dealer review is helpful too, because the traders or the risk takers in the firm know how to move the needle […] Everybody should get to choose where they want to be in the ecosystem and they know very clearly what the payoff is if we move up or down. That transparency really helps.
“It’s got to a point where heads of trading on the sell-side are using our scorecard because it’s unbiased,” he added.
Elsewhere, Dasgupta highlighted feeling fortunate to not be judged by a strict benchmarking process and the importance of truly understanding the intended and as well as unintended consequences of certain incentive structures.
“Your incentive structure will have an impact on your outcomes and as long as you’re comfortable with that, then it’s fine […] We try to be very agnostic about data. It’s very important for us and if believe something 100% in my heart but the data says I’m wrong, I’ll take it I’m wrong. That I think is the key to at least some of Two Sigma’s success.”