Equities
Liontrust is a specialist fund manager launched in 1995 . Based in London , it operates in the UK , Europe and Asia . Its fund managers invest in the funds they run , a feature the company says shows “ belief in and commitment to their investment processes and fellow investors ”.
“ I do see some room for reducing the broker list but I don ’ t want to cut too much and reduce our ability to source the right liquidity ,” said McLoughlin . “ We have a slightly larger list than average , but that is largely driven by the wide variety of funds that we manage . I believe that the majority of the buy-side community is looking to reduce the number of algo providers they use to around five or six and we are no different . We will review them regularly and change them when we deem necessary . At the same time , I do not want to put up a barrier to entry or block out new providers , as you don ’ t want to shut the door to innovation .” From a market-wide perspective , one of the significant changes of the last few years has been the increasing shift of volume towards the close of the trading day . This change is linked partly to another equally long-term development , the rise of passive trading and passive funds , which now account for a significant portion of daily trading activity . “ It is eye-opening to see how much volume there is at the close now , especially on index rebalancing days ,” said McLoughlin . “ A lot of it is driven by passive funds , index rebalances and
ETFs , which have gained traction over the past few years . On a personal note , although I have a lot of experience trading in the close , I find it more enjoyable to trade intra-day , especially where micro- and small-cap is concerned as I feel there is a lot of value that can be added .” One further complication to consider is that the rise of passive trading does put some traders off trading at the close , especially at times of index rebalancing , which is a time when passive traders are present in the market . This is because passive flows can exacerbate market swings , leading to performance that is far away from the expectation . A related case of the buy side exercising judgement may be the relationship with trading venues post-MiFID II , which could see some venues switched off by the buy side , according to McLoughlin . Under MiFID II , all broker crossing networks must reclassify as either an SI or an MTF , and they are no longer allowed to be discretionary in deciding who does and does not have access ; they must be open to anyone who meets the minimum criteria . “ We could see traders switching off venues that were previously operating as ELPs within BCNs , but who will most likely become SIs in preparation for MIFID II . Although I agree that we may want to interact with some of that type of liquidity and it is definitely not all bad , we may see investors requiring more compelling reasons before they access their new SIs . We currently use a range of methods to protect ourselves from interacting with toxic flow including venue analysis and using minimum fill sizes for example ,” said McLoughlin . The closing of the BCNs could itself throw up some interesting dilemmas , such as whether or not to interact with new SIs that have been created by electronic liquidity providers . The new rules could lead to a period of unintended fragmentation as new platforms emerge , but McLoughlin believes that in the medium to longer term there won ’ t be much fragmentation as the buy side will simply exercise discretion in deciding where to route flow and switch off or avoid connecting to any venues that don ’ t offer value . “ There may not be as much fragmentation as some feared ,” he said .
12 www . buysideintel . com March 2017