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,
www.buysideintel.com
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