Could trading become fully transparent?

Published on 22 January 2020

Total transparency might intimidate some traders, but honesty creates better performance, says Paul Squires, head of trading EMEA equities and Henley fixed interest at Invesco. Data analytics is a crucial skill for tomorrow’s traders, and increasingly importance in building confidence amongst investors, portfolio managers and the trading team itself, where applied correctly and in context. Yet best execution cannot be achieved simply by following a set of instructions; the expertise that traders bring to the market is being enhanced, but not replaced, by quantifiable performance measurement and automation.

Dan Barnes Welcome to Trader TV, I’m Dan Barnes. Investment managers are developing leaner, fitter trading teams to manage the buying and selling of stocks and bonds in the most efficient way possible for their investors. Here to explain how heads of trading navigate this evolution is Paul Squires, head of trading for EMEA equities and Henley fixed interest at Invesco Asset Management. Paul, welcome to Trader TV.

Paul Squires Thanks for the invitation, Dan, nice to see you.

Dan Barnes So can you tell me, how has the electronification of the equity market changed the profile of the equity trader?

Paul Squires It’s impossible not to have a sense of data analytics and what that means for your kind of decision making around execution. That really comes from the amount of post-trade analysis that we do, whether it’s around the individual trader, whether it’s around the investment decision of the fund manager, because sometimes investment timing is trying to capture a certain amount of of alpha short term. Whether it’s around the counterparts themselves and how they’re managing your order once you’ve given them the order, or whether it’s actually the influence of the ultimate venue itself, and how the impact of that venue on the outcome. Whether you sort of, by instinct, would categorize yourself as a high touch trade or a low touch trader, or anything in between or any hybrid of all of the different aspects. I think, to not understand data, to not have the curiosity around data, I think has become a barrier to being successful.

Dan Barnes If you’ve got traders who start off without that skill-set, but that becomes more important, how do you bring them forward?

Paul Squires I can talk to a sort of a automation industrialization. And it gives the sense that actually anyone could come in and just, you know, follow the the procedures manual and get the same outcome. That’s absolutely not the case, so, you’re right. Talking about this, it’s really important to get the right context. You don’t want commoditization of human resources. I’m not the first person to talk about the benefits of diversity, but that’s an obvious reference, so, how do you do that? I mean, fairly simple things, for me, is we discuss execution as a team. I’ve opened up complete transparency on individual traders performances, which is a sort of, you know, a nervous transition  in the first element. But actually, everyone now does it quite naturally. And you can imagine that what we’re trying to do is an aggregate team, is really just get the best outcome for the client. So that’s how we talk about it. And what everyone is aware of is, it’s not quite the same as having a good or a bad day on the sports pitch, but you can obviously rationalize that someone’s having a bad week, because they’ve got some orders that are absolutely going to be, as we would call them, TCA killers. And equally, you know the relative performances of people is always going to change. So, I think it’s important to try and sort of normalize that as much as possible.

Dan Barnes Can you use transaction cost analysis as a tool to improve traders, or is there a risk that’s just putting a simple number to their performance?

Paul Squires So there’s definitely a risk of looking at data in isolation. The onus is on us to make sure that we are identifying trades so that they are categorized in the right way. I think it’s particularly difficult on on fixed income. I think on FX over several years, different sort of shapes, I’ve seen very good FX TCA. I think fixed income continues to be perhaps the least sort of authentic evaluation of a trader’s performance. In equities I think it’s really, really strong, and I think it’s way beyond a couple of fairly bland benchmarks that people look at now. To some extent, I don’t really mind what the results are. What I do like doing is discussing the results with them. Because actually, just that process alone, talking about data points, generates a really interesting insight into the way they’ve been trading. Every trading desk will say they’ve got great communication and I’m not denying that, but there are always things that are once said, that only come out once you’re off the desk and, you know, you’re kind of making someone look for a set of data for the month. For me, that’s really the sort of hidden value of TCA.

Dan Barnes So, what’s your vision for the trading desk of the future?

There have historically been many links between the trader and the end client, and I think in some cases that’s absolutely appropriate. But in a lot of cases, you know, we can offer a service that actually the clients might want to engage with us more directly, whether it’s securities-lending or whether it’s something like kind of just collateral transformation. Whether it’s transitioning, you know, large sort of positions. I think that’s really where it becomes more interesting. And I think clients perhaps do have a curiosity. I certainly hope they have a curiosity about some of the things that we do, because I think their visibility of that has been somewhat limited up to now. So, I think that’s an interesting evolution going back to our first sort of introductory discussion. I think there will be automation, but I don’t think that necessarily means that the added value of the the human intellect and those skills goes away. The tools that the trader has now are way beyond what we used to have in the past, and the challenge is so much higher, quite rightly. The empowerment that we have goes with responsibility as we head into an SMCR regime, for example.So, I think, quite rightly, that ownership and responsibility will increase significantly.

Dan Barnes Paul, thanks so much.

Paul Squires Thanks very much for your time. I’ll see you, Dan.

Dan Barnes I’d like to thank Paul Squires for his insights and, of course, for you for watching. To catch up on other markets we cover, or to subscribe to our newsletter, go to TraderTV.NET or ETFTV.NET.