Buy-side Perspectives Issue 4 - Page 17

perception." The impact of a more data-led approach to trading has been significant. For example, Couellan notes that the data may prompt the trader to make an effort in an area that the trader has never considered before. It may prompt the trading desk to make use of electronic execution in some areas where it is more economic to do so than to use voice trading. The data can also be used to demonstrate best execution to clients. One potential area for improvement is the availability of benchmarks. For example, fixed income traders may benefit from the ability to compare themselves verses their peers with a similar profile. Couellan believes it would be quite possible for market price vendors to provide such a benchmark, although currently he is not aware of any such commercially available solution. While effective use of data may be desirable for the buy-side, it isn’t always cheap or easy to achieve. Couellan warns that the technology cost is often underestimated. AXA has groups of three to five staff dedicated to the technology. Nevertheless, he believes the end result justifies the costs. "The main limitations to run Fixed Income TCA are data quality, transparency and aggregation, I certainly forgot some points, but to me those are the most important. I mainly refer here to assets like emerging markets or high yield where it’s often more challenging, but not impossible, to obtain a reference price at the time you did trade to compare your execution against. Some data that we need today are missing, as not yet fully calibrated. FI TCA is related to the consumption of accurate and sensitive market data, which could be misused by ruthless users, and then, at some points, could impact negatively the market. " The impact of regulation could be significant on the fixed income trading desk, not just at AXA but at all buyside firms active in the market. One of the main impacts is that the buy-side firm will need to know whether each bond is considered liquid or not under the European Commission’s MiFID II June 2016 legislation. The distinction is important, because if it is sufficient liquid, the buyside firm carries an obligation to trade the bond in question on an electronic platform. However, Couellan says the immediate impact on AXA is likely to be limited, due to the caveats in the legislation. “Our average trading sizes are generally over the threshold required to have to engage pre-trade transparency. This is something that is likely to hit the sell-side more. As a buy side, I am really concerned about the post trade transparency impact , especially for sensitive trades, programs trades, larges blocks or issuers which could be under the limelight which will be made public after 48 hours, unless they will benefit from the deferred publication regime extended to 4 weeks by the NCAs. This post trades publication as defined and proposed today (i) could and will lead the banks to take less risk as principal as 48 hours later all the street will know, (ii) and also increase the snowball effect of such publications transparency, causing higher market impact. Moreover, it’s unclear to me how NCA from different countries will coordinate as well as what will be the criteria which lead to such decisions. I don’t know yet if this will change trading behavior but buyside will certainly have to adjust their trading strategies." That’s not to say the rules won’t have an impact, however. One of the concerns for AXA, like many other asset management firms, is that the ability to trade large blocks could be negatively impacted by the impact of additional transparency mandated by MiFID II. While technology can clearly impact on a buy-side firm’s trading and investment strategies, ultimately it is still human beings that have to make the big decisions (at least for the time being). For this reason, many firms are implementing Trade Management Oversight Committees. At AXA, the firm has a best execution committee, which meets on a quarterly basis. These meetings are attended by a compliance officer, as well as internal quality control specialists. Couellan believes clients should also be a part of these meetings, along with the trader and the fund manager. "We have regular Best Execution Committee with fund manager, heads of FI Trading and Business quality team members which ensure that Fi executions are done in respect of internal procedures and regulation.. We generally review our internal KPI and provide rationale regarding, as an example, to what extent we used more electronic trading on specific areas. These are the kinds of issues it could help to address.” In terms of the rest of the buy-side community, Couellan is relatively open to the idea of sharing information with other similar buy-side firms and working with vendors, if that will help to make TCA more effective. "First, I am convinced that the buy side industry will benefit to increase the collaboration which is essential to avoid diversification in the FI projects. It will be successful for leading projects like TCA, transparency, etc… as well