Rising retail participation, heightened market volatility and increased scrutiny of clearing and settlement expenses are reshaping Erste Group’s approach to measuring the true performance of executed trades. David Haberfellner, head of desk at group markets execution, discusses the firm’s rollout of a new order management system designed to deliver greater transparency and control across the full trade lifecycle. He shares his team’s differing strategies for managing institutional and retail flow, and how the banks approach to scrutinizing costs has evolved—putting a sharper focus on downstream clearing and settlement expenses.
Looking ahead, Haberfellner highlights plans to increase investment in technology, tech skills and closer collaboration between business and IT teams.
Interview
Josephine Gallagher – So, David, you run a central execution desk, and you manage both institutional and retail flow. Tell us, what are some of the most notable trends you’ve seen so far this year across those segments?
David Haberfellner – Well, what we definitely see is a continuation of last year, where we saw a huge increase in retail participation. So there we see that also the retail participation is highly linked to single events, like, for example, Liberation Day, now, already some time ago. But in January, it’s very close to news (impacted by news). So then we see spikes of up to five times the standard flow on a standard day. So this definitely is still important, and even more important than last year. On the institutional side, at least our clients, I think it very much depends on the client base you have. But our institutional clients, they tend to stay rather calm. So the single events do not necessarily lead to spikes in terms of institutional orders on our side. What we definitely see as well is a high interest of retail clients into more structured products. So compared to the US, this is not yet so developed in Europe. In the US, futures and options are really, really common for retail clients. In Europe, this is not the case, at least not to that extent. I think, on the one hand, because all of historical reasons, and on the other hand, also because of the market structure. So for example, margins and contract size is different in Europe. So what we do in order to tackle that demand is that we at Erste Group we are offering various structured products, very bespoke to the client demand. This has not only the advantage that you can also trade it with smaller sizes, but also the advantage that you can really react fast, and you can also we at Erste Group, always try to give our clients a decent option in terms of protection as well. So with the structured products, you can also really invent a product which also gives some protection to the client.
Josephine Gallagher – You mentioned a little bit there already. But how do you differentiate and adapt your execution strategies for institutional versus retail clients?
David Haberfellner – Well, I think in terms of institutional, we have quite a common setup. So we are, of course, focusing on TCA (Transaction Cost Analyis) market impact, things like that. We are trying to provide our clients, or the Erste clients, with a consulting service in terms of algos, which algos they should use, they could use. For retail, this is definitely different. You have to optimize for different parameters. Of course, the price is still very important, but I think the costs are way more important. And if we are talking about the costs for us, it was really a key learning within the last years when we implemented a new order management system that you have to focus on each and every step in the process. So it’s not sufficient to only look at the price and the trading fees. It’s maybe even more important to look at the settlement and clearing costs. If you have those costs under control, being it with more standardized approaches like aggregation and netting, which is pretty common, but also to really try to get the last sense out of it, this really helps a lot. Yeah, on the one hand, it helps, of course, the client, so that we can offer him / her /them a competitive offer. But on the other hand, of course, it’s also important for our P and L (profit and loss) that we don’t spend huge amount of money on settlement costs.
Josephine Gallagher So as you said, you look at the full trade lifecycle when it comes to assessing costs. How do you measure implementation shortfall and overall transaction costs, from execution right through to clearing and settlement?
David Haberfellner – Here it’s important to differentiate between the institutional and the retail world. For the institutional world, there are really a lot of tools out there which we, of course, use. So on the one hand, we are using third-party data. We are also using reports from the brokers we are having in place. We are using some benchmarking on the algos. So actually there, of course, slippage is important. It’s more the market impact of the order, which is in the focus. Compared to retail, is completely different, because usually the liquidity is only important at the point in time of the order arrival, because it’s usually not over an hour or even a day or longer. So with retail, what we figured out is that it’s really important to have a front-to-back analysis, which I already mentioned before. And maybe to give just an example how important the settlement and clearing costs are. Giving the sample, we do not net or aggregate downstream, we pay one euro per trade. So, given we have 40 trades, we would pay 40 euros. If we aggregate that same ISIN (International Securities Identification Number) buy and sell, then we simply pay just two euros, and if we can then net that one trade in terms of settlement, then we pay one euro. So there’s a huge potential in leveraging on settlement and clearing costs and this is crucial for our retail clients, on the one hand, in order to offer them better rates, and on the other hand, it’s also important for us in order not to spend a lot on settlement in terms of money, but also in terms of effort.
Josephine Gallagher – There’s also a lot of discussion around extended trading hours and the potential move to 24/5 trading hours. How do you see that playing out, and what potential impact could that have on spreads, liquidity and market fragmentation?
David Haberfellner – Yeah, it’s a bit of an interesting discussion, because I don’t know who remembers it, but some four years ago, we were discussing about shortening the trading hours, I think it was the London Stock Exchange. Now we are discussing about widening the trading hours. So this is kind of interesting. I think this whole discussion is mainly driven out of the retail perspective and there we see that it makes sense to have this discussion. For example, on our desk, we see that already 1/3 of the European orders is received outside the core trading hours, outside the trading hours of the primary especially, of course, in the evening, when people get home from work, then they have ideas what to trade. So for retail, this is definitely important. We already have in Europe, seven to 11 from Monday to Friday. And now some venues already started, mainly retail venues of course, who are only retail venues. They already started what they are going about to start offering, also on Saturday and Sunday trading. So this is already quite familiar. Of course, there are two sides to the coin. During the primary opening hours, liquidity and spreads are not an issue. But the more away you are from those hours and the more volatile the market is, the higher the spreads are. So there also, as a retail client, you have to be careful, even if you trade small sizes, that the spread is not too large..
Josephine Gallagher – And finally, to wrap things up, what other industry or execution trends are you focusing on right now for this year?
David Haberfellner – Well, maybe it’s not the new thing, but just out of experience, I want to re-emphasize it. We built a new order management system. We are now having roughly 7.5 million orders a year, worth 300 billion euros. So it’s quite significant amount. And for us, it was really key to team up with IT, not to do it in parallel, not only to have a nice relationship with them, but really to team up. So a lot of our IT guys know how the business works. On the on the other hand, also on my desk, I expect that the new colleagues are having an idea about IT. It’s not that they have implement it but this common understanding is really important. I think it’s important to keep up with everything, but also important to implement new trends, for example, ETF (exchange-traded funds) trading there really developed a lot, and this was only possible because of this close cooperation understood.
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