FTSE Global Markets - Autobahn - Deutsche Bank

US TRADING ROUNDTABLE 

LESSONS FROM MARKET CHANGE: 

WHO WINS, WHO LOSES IN THE 

NEW TRADING PARADIGM? 

Photograph © FTSE Global Markets, supplied July 2012. 

Attendees 

(From left to right) 

CURT ENGLER, quant and automated trading, JPMorgan Asset Management 

JOSE MARQUES, global head of electronic equity trading, Deutsche Bank 

ROB KAROFSKY, global head of trading at Alliance Bernstein 

MIRANDA MIZEN, head of equities research, TABB group 

FRANCESCA CARNEVALE, director, FTSE Global Markets 

F T S E G L O B A L M A R K E T S • J U LY / A U G U S T 2 0 1 2 

Supported by: 

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TRADING ROUNDTABLE 

WORKING IN A NEW PARADIGM & 

HOW BEST TO FIND LIQUIDITY 

JOSE MARQUES, GLOBAL HEAD OF ELECTRONIC 

EQUITY TRADING, DEUTSCHE BANK: The markets 

today are as challenging as I’ve ever seen in my career, not just 

from a pure execution and quality of execution perspective, but 

in really understanding the liquidity landscape and how to 

navigate it in a way that allows my clients to really exploit the 

limited liquidity resources that are out there, and how as a 

broker we can create value for them in that process. 

CURT ENGLER, HEAD OF QUANTITATIVE AND 

AUTOMATED TRADING, JPMORGAN ASSET MAN- 

AGEMENT: We are focused on optimising the trading 

process. That includes understanding the portfolio manager’s 

process and researching the trade data which allows us to 

automate a significant amount of our flow. That also means we 

have to monitor both the macro and micro segments of the 

market, to better understand what is going on with volume 

and volatility. Many of our automated strategies are in house 

algorithms that we can tune to specific portfolio managers as 

well as market conditions. For us business is now about having 

to be on top of the portfolio manager’s process, the characteristics 

of the orders, and the market conditions. 

ROB KAROFSKY, GLOBAL HEAD OF TRADING AT 

ALLIANCE BERNSTEIN: There is also another element in 

play: that is, the trader is getting closer to the investment 

decision-making process in a world where liquidity has 

become a scarce resource. The ability to react quickly is 

dependent upon understanding which way your portfolio 

manager is going to zig and which they’re going to zag. It is 

about taking the trading and execution business directly 

into the investment process; and this trend is relevant and 

essential because of the difficulty of finding liquidity. In a 

highly volatile and highly correlated environment there’s a 

tremendous amount of alpha that can be extracted through 

the trading desk. 

We are in a new paradigm and I don’t think that it is 

necessarily cyclical. Certainly, it is unlikely that we will 

revert back to the 9bn shares a day that we used to trade 

in the United States. In part, this is because everything 

we’re living through now is a by-product of the two crises 

that have occurred during the last three or four years. In 

part, it is a function of a trend where equities as an investible 

asset class are out of favour. Year to date, we have 

seen in excess of $70bn in outflows and it is a continuing 

theme and this money is moving into fixed income. When 

you have global monetary authorities telling you that rates 

will be low through 2014, it’s an issue that will keep us out 

of equilibrium for some period of time, whether it’s artificial 

or not. Moreover, it is destructive to the liquidity in the 

equity markets. For that reason, I don’t believe that 

liquidity in the marketplace (and hence volumes) will pick 

up until money begins to flow back into the equity asset 

class. That will only happen when rates, particularly short 

rates, begin to rise and force people out of fixed income 

and into equities. 

MIRANDA MIZEN, HEAD OF EQUITIES RESEARCH, 

TABB GROUP: Our role is to look across the industry as 

objective observers. We spend an enormous amount of time 

talking to the market practitioners that make up the marketplace. 

We see a huge amount of changes are both currently 

visible and some that may happen that will change the 

makeup of the market and liquidity patterns. Regulation 

and technology have both become equally challengers and 

facilitators in the market and are both developing at a very 

fast pace but the hunt for liquidity is not getting any easier. 

ROB KAROFSKY: One more thing: if you look over the last 

several years, the absence of retail in equity trading has significantly 

exacerbated the situation. If the retail component 

is gone and if you’re talking about liquidity between one 

large asset manager selling and another buying, it is like 

ships passing in the night. You then are dependent upon 

finding that other large institutional holder on the other side 

of the trade if you will; it makes the problem of sourcing 

liquidity that much more complicated. So once again I say, 

we are living in a new paradigm and this paradigm will 

remain for the next couple of years, at least. 

JOSE MARQUES: There has been a lot of press over the last 

couple of years about the role of liquidity providers in the 

market. There used to be specialists who were clearly identifiable. 

You could walk down to the exchange and if you didn’t 

like the other side of a transaction, you could challenge the 

person directly. Nowadays, liquidity has become much more 

anonymous. When we talk about liquidity, it really is about the 

ability to convert cash into securities and securities back into 

cash and how quickly and how fungible that process is. 

In that regard, the role of the liquidity provider is greatly misunderstood 

in today’s marketplace. When you look closely at 

the dynamics of what’s going on, a buy side to buy side natural 

match happens with such small frequency that it’s almost de 

minimus. If there really was a buy side to buy side relationship 

then platforms such as Liquidnet would have huge market 

share. In reality though, this does not happen, simply because 

if one buy side institution wants to sell, it doesn’t automatically 

mean that there is a buy side institution that is willing to buy. 

Instead there is an entire ecosystem of liquidity providers 

that have evolved in the marketplace and they collect a toll 

for their services. Having continuous liquidity has never 

been free and it is certainly not free today. What you see on 

the shortest horizons are the high frequency market makers, 

and they are intermediating those trades a couple hundred 

shares at a time and taking a tiny slice out of those trades. 

Next on the horizon are the statistical arbitrage traders, who 

are in fact intermediating the high frequency guys and they’ll 

take inventory and keep it in mid-air for anywhere between 

a few minutes to a few days. Then there are the slightly 

longer horizon players, which include the hedge fund 

community, which in turn will keep inventory in suspended 

animation until a long-term player on the other side shows 

up who perhaps wants to do the whole process in reverse. 

It is this ecosystem that provides the liquidity and ultimately 

intermediates a long-term buyer and a long-term 

seller, which can show up hours, days, weeks, even months 

J U LY / A U G U S T 2 0 1 2 • F T S E G L O B A L M A R K E T S

Jose Marques, global head of electronic equity trading, Deutsche Bank. 

Photograph © FTSE Global Markets, supplied July 2012. 

apart in time. Certainly, from a regulatory market structure 

perspective, we need to understand how this works. We 

need to know what the cost of this liquidity really is and 

what structures ultimately make the markets more efficient 

and maximise the amount of instantaneous liquidity 

available for everyone. One interesting point is that the very 

richness of equities as an asset class that drives the diversity 

the ecosystem which in turn delivers the tremendous 

amount of continuous liquidity we see. 

CURT ENGLER: We have had such an interesting period of 

a rather volatile macro environment; when volatility comes 

down, liquidity is going to come down. At the same time, we 

have had such deleveraging out of a lot of strategies that 

were called more intermediate term—as Jose explained— 

that everyone used to be leveraged a lot higher than they are, 

particularly as banks are also lowering their leverage ratios. 

Whether this really is or is not a new paradigm, I cannot say. 

I don’t know what the headlines are going to be tomorrow 

that might completely change this set up. 

ROB KAROFSKY: This is an interesting point, that volume 

and volatility are linked. Volatility goes up, and volumes 

obviously increase and as we have seen, a larger percentage 

of that increase is going into ETFs and not individual stocks. 

When (and if) we do get into a better paradigm where 

volumes pick up, we need to see that link between volumes 

and volatility break. Would you agree? We need to achieve 

healthy volumes without market volatility. 

CURT ENGLER: You would have a lot of happier people in 

the industry rather than the other way around. It is certainly 

better than the alternative where volatility spikes and 

volumes remain low; that’s a double whammy. 

ROB KAROFSKY: Actually, we do have that. 

CURT ENGLER: Liquidity can still be fleeting in the shortterm 

if you are too much of a liquidity demander and that’s 

going to lead to higher costs. If all else is equal, volumes stay 

the same and volatility goes up, leading to higher costs. So, 

if we could ever get that sweet spot where volatility stays relatively 

constant and volumes start picking up, then correspondingly 

trading costs should come down all else being 

equal and I would welcome that. The question of course 

hangs around how we make that happen. 

ROB KAROFSKY: As I look at the world, I see would look 

for the signal that assets (or money) are flowing into equity 

assets and equity risk premiums are coming down, which 

correlates with your comment about volatility. People will 

have to feel much more comfortable in the equity space 

and once that happens you can have volumes without the 

volatility. We would, in that instance, turn the corner. 

JOSE MARQUES: Another way of looking at this is correlation. 

In the current high correlation environment you’re seeing 


people coming into the market demanding macro equity 

exposure. But they come in one day and they leave the next day 

and, at the same time, you’re seeing a lot less of a stock 

selection process happening. So you get exactly what you see. 

MIRANDA MIZEN: Last year the combination of higher 

volatility and the higher volume also resulted in a higher 

percentage of high frequency trading. If we have lower level 

of volatility and if we see assets coming back into the market, 

we should see the participation rates of some of the participants 

in the market change proportionally. 

ROB KAROFSKY: Well, it increases the odds in a lower 

volatility environment of two ships hitting each other when 

they pass through at night. 

JOSE MARQUES: The data there is pretty straightforward. 

About 30% of liquidity is found within broker pools in general 

or dark venues overall. You see that in the TRF volumes for the 

US. The rest is found in the broad markets. The underlying 

question there seems to be: do we need 48 different dark pools 

and 17-plus lit venues? Clearly not. On the other hand, the 

technology has gotten cheap enough and robust enough that 

connectivity between venues is not the hurdle that it used to 

be and in some sense, it has gotten cheaper. 

One of the underlying benefits of our highly decentralised 

marketplace is a tremendous amount of robustness in our 

markets. It used to be front page news whenever NYSE had 

a system outage and stocks could not trade for a whole 

afternoon. When was the last time you saw a headline like 

that, aside from May 6th 2010? There have been real benefits 

to the fragmented structure, but like anything you can overdo 

it and there is a selection process underway. Even so, the costs 

are not outrageous; at least not for most participants. 

MARKET EVOLUTION: HOW FAST & 

DEEP IS THE RATE OF CHANGE? 

FRANCESCA CARNEVALE: Miranda, has TABB Group 

undertaken any research that looks at how the overall 

market structure will look in a few years time? As Rob highlights 

there is a paradigm shift in play. Surely, that must test 

existing structures and institutions and firms to the limit. 

How might it play out over the long term? 

MIRANDA MIZEN: We have undertaken a number of big 

studies around this theme, talking to long only asset 

managers and hedge funds, both here and in Europe. In 

January this year, we talked to 51 hedge funds and found a 

perhaps surprising level of optimism in the market. Many 

were thankful last year was over as they had found that 

volatility around volumes was extremely testing. There was 

a certain relief they had managed to survive a brutal trading 

environment and ventured that (overall) this year would be 

better, that early election fever would reinvigorate the market 

and that commission wallets would increase. However, that 

was early in the year and as the months have passed, that 

optimism has not played out. 

There are a number of trends coming in play as a function 

of lower trading volume. Low commission wallets mean 

there is not always enough to go round and broker lists are 

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being scrutinized, especially as you look down the length of 

the tail. There is not a major change in commission concentration 

levels at the top. But brokers who are sitting on lists 

and haven’t seen order flow from their client for a year are 

very vulnerable and in some cases tails are being chopped 

quite aggressively. 

Asset managers are also re-examining some of the tools 

they’re using and how they want to access the market. If it’s 

obvious where liquidity is concentrating, the decision is how 

to interact with that liquidity. But especially in the dark, 

liquidity may be so scattered it’s hard to know if there’s 

another ship out there, let alone if it’s passing you in the dark. 

So there’s a constant demand for better tools such as those 

that combine block trading with algorithms and that can 

interact with the different types of liquidity, and duck and dive 

electronically in the market like the traders do. But tools 

aside, low volume markets and shifting liquidity patterns 

due to both trading styles and investment decisions require 

a re-think with regard to how to approach the market. 

We have this paradigm shift and although we all hope 

volumes will rise again, it doesn’t look likely in the short term, 

particularly in Europe where the outlook remains poor and the 

regulatory environment is undergoing a major upheaval. 

FRANCESCA CARNEVALE: Jose what is the role of the 

sell side in easing everyone’s pain? 

JOSE MARQUES: In today’s environment, the role between 

a broker and the buy side has turned back to the fundamental 

value propositions brokers traditionally have offered. In 

other words, if you ask: what is the role of the broker in the 

marketplace? It is to source and aggregate liquidity for the 

buy side and provide it to them in a cost effective way. By cost 

effective, I am not talking about commission rates; that’s 

really the total impact of trading. A good broker is going to 

deliver execution, and not leak information; a good broker is 

going to be able to provide you liquidity in whatever it is 

you’re looking for in the cheapest way possible. Then if he 

does it well, you’re going to reward him. 

Over the last couple of years, there’s been a lot of angst 

around the new electronic market structure and the problems 

this structure has created for participants that haven’t yet 

invested in the latest and fastest technology, whether that be 

co-location, or the whole techno-parlance of the new world. 

Ultimately, we have a pretty simple message to these folks, 

which is: if you don’t like your executions, get another broker. 

At the end of the day, the broker’s role is to provide technology 

and smart, intelligent execution, to control information 

and give clients a buffer on those hard to trade trades. If your 

broker is not effective, you must find someone who will 

move your business accordingly. 

CURT ENGLER: There’s a lot in this conversation to synthesise. 

I guess I’ll start by piggy-backing on two of the 

comments Jose made about the broker’s role and (as well) 

the trader’s job to understand the investment process better. 

Both those comments were spot on. Certainly, as markets 

evolve the buy side trader will increasingly be tasked with 

being more strategic in the whole investment process. In any 

case, it is incumbent on the buy side trader to better under- 

Curt Engler, quant and automated trading, JPMorgan Asset 

Management. Photograph © FTSE Global Markets, supplied July 2012. 

stand the importance of the overall investment strategy that 

determines his trades as well as to be more proactive with 

regard to sourcing liquidity so that, if one of those ships does 

show up, the buy side trade should to be able to filter that 

trade in a way that is better for the portfolio manager. 

On the electronic side, given that we make the effort to 

better understand the portfolio manager’s process—whether 

it is what factors they use for stock selection, or their portfolio 

construction criteria—and understanding that process to 

the point where the broker’s role is going to evolve further. 

I actually think the broker’s role will become more difficult 

and complex in future; particularly as technology is now one 

more level of disintermediation of the sell side to the point 

where we can now make all of our own order placements, 

rather than just placing it one scheduled algorithm and 

work on the basis of the anticipated outcome of that. 

MARKET FRAGMENTATION: GET 

OVER IT OR UNDER IT? 

JOSE MARQUES: Execution and portfolio implementation 

costs have come down over the last ten years. Over 

the last six months, they’ve probably bottomed out and 

maybe ticked up a little bit because of t`he dramatic fall off 

in overall market volumes and liquidity. However, market 

structure changes have driven a great deal of that drop in 

terms of real trade implementation costs with tangible 

benefits to investors. 

FRANCESCA CARNEVALE: Hasn’t there been an 

attendant cost in terms of connectivity, technology, investment 

in new processes and linkages with brokers and 

trading venues? 

JOSE MARQUES: Collectively the sell side spends 

hundreds of millions of dollars to develop and maintain its 

technology, for sure. 

ROB KAROFSKY: As the world has become far more 

reliant and dependent on technology, both sides (and it is a 

relative spend) have had to spend on technology and 

become aware of measured tools and things like that. So that 

the explicit costs that Jose mentioned have been coming 

down and perhaps bottoming is true. Also, the costs of 

being able to navigate the 40-plus dark venues and 17 or so 

lit exchanges has also been an offsetting cost. 

JOSE MARQUES: Yes, costs elsewhere in the system have 

also emerged. TV cameras used to pan around the heavily 

populated floor of the New York Stock Exchange, where in 

the mid-1990s you could barely walk through the crowd. It’s 

a very different picture today and that is the very real impact 

technology has had. Of course, this has occurred at all levels 

through the markets and in the trading process. We used to 


have tens of thousands of people to clear trades. As an 

industry, those numbers have come down. There are efficiencies 

that have been extracted, even though the technology 

costs and people resourcing around technology have gone 

up considerably. 

WHERE DO YOU FIND ADDED 

VALUE AS MARKETS CHANGE? 

MIRANDA MIZEN: A major area of differentiation that is 

being highlighted over the last six to twelve months is 

coverage. Take algorithms, the most commoditised area of 

trading. You often hear the buy side grumble there’s little real 

difference between many of them. In fact there is, both in 

terms of the algorithmic environment and liquidity accessed 

as well as in the surrounding services. It isn’t necessarily 

someone coming with a new algorithm that’s really going to 

make the difference; it may be the coverage person stopping 

by, taking off his jacket, sitting down with the client and 

talking about how they access the markets and talking 

through how they trade their orders, the kinds of algorithms 

they need and are comfortable using, how individual algorithms 

work with certain market conditions. Increasingly, 

coverage combines both elements of high touch and low 

touch services. 

A major factor is trust, because there’s no way in a highly 

volatile, fast-moving market that someone is going to use an 

algorithm if he doesn’t know how it performs and exactly 

what to expect. Partly this is a function of understanding 

both the market dynamics and the technology and having 

transaction cost analysis tools, but equally, there is also a 

level of human interaction, in terms of providing the 

knowledge to use those tools very efficiently. It’s the same on 

the high touch side; you have to be able to trust the person 

at the other end of the telephone if you’re doing a trade. 

The buy side is demanding greater insight into how the algorithms 

are working. Not everybody wants to look under 

the hood and know where the fan belt is, but in terms of 

order placement logic that Rob mentioned earlier, if the 

order is being exposed in the dark, where is it being exposed 

and to whom? In other words, I want to know where it 

traded, but I also want to know where it is going and what 

level of exposure goes with it. Who am I trading with and 

what is the quality of liquidity at the other end of the order 

that may help or not help my order flow? This transparency 

is partly coverage, partly product. Ultimately though, they are 

two halves of the same whole. 

CURT ENGLER: If the buy side is going to make the effort 

to understand what the portfolio manager’s process is (and 

that the technology is available) we are doing our fiduciary 

role to own the order execution process as well. We’re the 

ones putting the fixed tags in place, because we want this 

many shares placed at this location for this amount of time, 

for example. In this regard, the buy side has been the biggest 

winner on the transparency front to actually understand 

that logic as well as then mine any resulting analytical data 

for relevant analysis of orders. People may or may not want 


to get into that minutia, but once you do, you learn from how 

orders are placed at various venues, and where the margins 

are made; understanding that entire process is now integral 

to doing our job well. 

FRANCESCA CARNEVALE: Is that typical though of all 

buy side trading desks? Or, is that typical of large buy side 

trading desks of the magnitude of your firm, and that of 

Rob’s trading desk? It is easy for you, you have resources, and 

you are huge asset gatherers, are you not? 

CURT ENGLER: You are right, scale certainly plays into it. 

We traded $250bn last year and a basis point matters on that 

volume. If you’re a smaller asset manager there are likely 

different investment strategies and other business considerations 

involved. In that instance, the effort required may be 

too onerous or high a hurdle. Even so, technology is almost 

ubiquitous enough now and in that sense there is a really 

low entry level that will allow you to do some of these things 

quite easily. 

FRANCESCA CARNEVALE: Jose, in this environment and 

with that minute detail required, knowing your client very well 

indeed is vital to a successful business strategy, isn’t it? 

JOSE MARQUES: Absolutely, knowing your client as well 

as every detail of their trading processes and trading technology 

is essential. As Curt acknowledged, access to modern 

trading technology is very democratic, even for small buy 

side firms or even retail participants, due to the massive investments 

made by the sell side. The key is helping clients 

apply the appropriate technologies to their specific trading 

problems. It’s not all about speed either. Some of the most 

important technologies are all about quantitative processes, 

down to the microstructure level, involving how you place 

trades, how you read that order book, which venues you go 

to and when, and understanding the intention behind that 

order when it was sent. 

Moving up the value chain, one of the things that both 

Curt’s and Rob’s firms do extremely well is understand the 

alpha of the portfolio manager and how to modulate trading 

to maximize alpha capture. These are things that the sell side 

can absolutely provide for all clients and do so by modulating 

the behaviour of algorithms based on who’s trading on 

the other side and the portfolio manager’s intentions. This is 

becoming a very important part of the business because 

capturing a few extra mills here and there adds up to percentage 

points of incremental returns. 

FRANCESCA CARNEVALE: Rob, there’s probably not 

much any sell side trader can teach you. So where do you 

look for value-add from your sell side provider? 

ROB KAROFSKY: Actually, it is complicated navigating the 

marketplace. Both Curt and Jose mentioned basis point 

matters on a lot of notional trade and that’s absolutely true. 

It is how you capture that basis point. Plus, to me that’s the 

interesting part. It is not just being a liquidity provider versus 

taking liquidity when you’re executing electronically. Where 

the sell side truly helps us is in understanding when to 

trade with more urgency and understanding when to trade 

more slowly. It is taking advantage of liquidity when it comes 

to your doorstep and trying to understand where the alpha 

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is embedded in your order flow if by definition if it is a 

value order and in that instance you should trade more 

slowly. It is about helping us understand the subtleties and 

complexion of the market. 

FRANCESCA CARNEVALE: Is that a conversation that 

happens before the trade or in real time? 

ROB KAROFSKY: It happens in real time and it is ongoing 

and it speaks directly to an initiative that many firms 

on the sell side are taking where they’re trying to combine 

both the electronic and high touch points and deliver 

something to clients that hasn’t necessarily been delivered 

up to this point. Now, you could argue that this has 

happened through daily dialogue in the past. However, 

there has been a sea-change; there is now a more 

concerted effort by the sell side to be part and parcel of the 

process. I am working slowly, trying to have minimal 

impact in a particular situation, but if something larger 

comes along, I am interested. It is about effectively 

combining those different approaches that people are attempting 

to achieve now. 

FRANCESCA CARNEVALE: Can you measure the 

efficacy of this approach in numerical terms? 

ROB KAROFSKY: It is difficult to capture 100% of the 

dialogue, the relationship that you have on a daily basis, but 

it shows up in your performance and we’re constantly evaluating 

how we’re doing. We evaluate it every day. And we 

can directly attribute it to brokers that help us achieve the 

numbers, whether it is through their trading pipes or 

whether it is through a piece of liquidity that comes through 

their high touch area. 

JOSE MARQUES: At the end of the day, realised portfolio 

performance matters. From the moment that a portfolio 

manager decides he wants to buy or sell a security, at that 

instant prevailing market prices are the most relevant 

benchmark. Often arrival price, the prevailing market price 

when the order is received by the sell side desk is used as a 

proxy. When you look at the newest and most creative ideas 

we have implemented, they are around creating opportunistic 

liquidity-seeking algorithms that really go after alpha 

directly and minimizing slippage to arrival price. When the 

liquidity is there at an excellent price, clients take all they can, 

and when it is not there, they fade the trade and become 

patient. Doing that effectively is important. 

Now that’s what we do at the end of the value chain, but 

there is also an important piece in the middle of the value 

chain - between the portfolio manager and the sell side - and 

that’s the role of the buy side trader to finesse. We don’t have 

complete transparency as to the alpha of an individual 

portfolio manager. We have some if it is provided to us, but we 

can’t pick up the phone and call the portfolio manager and ask 

him: do you want me to be more urgent with this order? 

That’s the role of the buy side trader who is to understand his 

portfolio managers and what their liquidity needs really are. 

I would say it is when all three parties are working 

together on this value chain that delivers the best outcome. 

A portfolio manager has to be sensitive to his own process 

and know when he should be aggressive and communicate 

that to his desk, and then the buy side desk can give the appropriate 

signalling to their sell side counterparts. The 

process works in reverse too. If you look at a portfolio optimisation 

process, there are some implicit costs that go into 

doing the optimisation. If all of the sudden I can offer a big 

chunk of liquidity at a very cheap cost, the portfolio manager 

might look at that and say: yes, that’s attractive if I can get 

it on the cheap. Otherwise, he might not have done that 

marginal trade. So, pushing that information back is very 

important too. That speaks to the hybrid model Rob was 

talking about, where we combine the smarts of the electronic 

world with the sensitivity of the high touch world where we 

really know the client; then we will be able to push that 

alpha back the other way. 

BROADENING THE SKILL SET: 

ASSETS OTHER THAN EQUITIES 

FRANCESCA CARNEVALE: All this understanding is 

well and good. However, there are big macro forces in play 

right now. As buy side trading desks, you’re at the forefront 

really of the movement out of equities and into fixed income. 

How, in turn, are these changes in asset allocation changing 

the way that the buy side trading desk operates? 

CURT ENGLER: Our desk definitely has a broader skill set 

now than before. Historically I guess everybody would’ve 

had experience on the single stock side, whereas now we 

have two quantitative analysts that are on the desk full-time 

now that are the ones who are helping craft the trading 

strategies and fine tuning the strategy given the market 

dynamics. Along the lines of having people who can speak 

the language of the portfolio manager, we have three (CFAs) 

involved too, all the while still having very experienced 

traders we have hired either from buy side or the sell side on 

the desk. However, I would say we have broadened the skill 

sets on the desk considerably in response to the market 

rather than any sort of shift in what asset class is in favour 

or not So having that mix of those different and differentiated 

skill sets has been the direction we have taken. 

ROB KAROFSKY: I’d say two things. One based on what 

I initially said about being in a new paradigm, there’s been 

a shift, from the sell side to the buy side in terms of understanding 

how to price assets better and how to source 

liquidity. We’re definitely seeing that shift. It is a scarce good, 

if you will, and the onus is on us to develop expertise in that 

area. So, we have certainly moved in that direction and what 

that means is staffing the desk appropriately with people 

that have that type of experience. 

The second thing in terms of dealing with the overall environment 

as far as asset flows, that we absolute need to 

scale our desks appropriately given the global volumes that 

we have experienced and that we probably will experience. 

That’s a similar exercise that’s happening on the sell side as 

well. We have seen a lot of capacity come out and my guess 

is we’ll continue to see more capacity come out. 

As far as expertise across asset classes toes, the worlds are 

correlated, more so than they’ve ever been. If you’re trading 


Rob Karofsky, global head of trading at Alliance Bernstein. Photograph 

© FTSE Global Markets, supplied July 2012. 

equities and you don’t have that vital understanding of how 

credit markets will impact equities, you’re missing an 

important step. Therefore, if the world is going to be more 

correlated, you need to have an understanding of how commodities 

and credit and things of that nature are going to 

impact idiosyncratic moves in stocks. 

One of the things that we have done is we have moved all 

of our trading capabilities onto one floor to help enhance 

that connectivity. It is important than having one person 

trade multiple thing. Given our size, it is not realistic. With 

smaller hedge funds or smaller asset managers, it is more 

that they aren’t dealing with as many transactions so perhaps 

it is more achievable, but I still think, at the larger institutions, 

that you need a certain amount of specialisation in 

order to effectively executive and more importantly become 

embedded in the investment process. 

FRANCESCA CARNEVALE: How much analytical work, 

Miranda, is being or has been done on the long-term impact 

of these changes in the way that buy side trading operations 

are structured and the increased skill sets that are being 

imported into the buy side? What ultimately might this 

mean for the definition of sell side services? 

MIRANDA MIZEN: As an average over the last couple of 

years on the buy side, and taking in the biggest and the 

smallest firms into account, we haven’t seen a huge amount 

of change in terms of sheer numbers of people per desk. But 

obviously the markets are a lot more complex so each person 

is doing a lot more. The point Rob made about having to worry 

about credit risk as well as credit markets is true. There is a far 

greater need for and awareness of the influence of other asset 

classes on equity trading or geographical influences. May the 

6th Flash Crash was a classic example: one minute the events 

in Greece were being played out on the television, the next 

minute they were unravelling on our own trading doorstep. 

To stay on top of so many different things going on has led 

to investment in seamless toolsets on the desktop, reducing 

any manual handoffs in the execution chain and expanding 

and improving the capabilities of execution management 

systems on the desk. There will never be a one size fits all 

solution going forward, that’s for sure. There needs to be flexibility 

and there are very few systems that do absolutely 

everything extremely well that everyone needs. Nonetheless, 

there is a very high attention being paid to how the tools 

interact, both from the execution and into the order management 

systems and back into all the way back up to portfolio 

managers. Some of that is being driven by regulation and the 

need to have new compliance procedures, reduce risk, add 

new reporting standards and make sure that there aren’t 

manual processes and file transfers that introduce risk 

because it’s a break in the chain. 


While the trading desk size hasn’t changed significantly, 

the scope of what some buy side firms trade has. A small 

hedge fund for example may have a trading desk of two 

people; trading the US markets is one thing, but it is a 

different story when branching out to trade markets on the 

other side of the world in search of alpha. While larger 

houses have local offices and have the choice of building 

their own technology, most rely on their brokers for the 

combination of access, information and execution tools. 

JOSE MARQUES: A few years ago there was a lot of talk 

about multi asset class convergence - where in the future 

you’d stack every asset known to mankind, working with 

geniuses who would be able to trade everything all the 

time and never sleep. That’s simply not realistic in the real 

world. The role of the specialist in asset classes isn’t going 

away. There are a lot of idiosyncrasies, market microstructure 

issues, regulatory issues that vary dramatically across 

the asset classes. So what we’re doing and what you’ll see 

broadly is that the specialisation function, both on the buy 

side and the sell side, will remain and what is happening is 

a convergence of tools and trading techniques across 

different asset classes even as regulators drive for uniformity 

of market structures. For instance, now algorithms are 

applied to FX trades. Liquidity seeking algorithms that 

have been developed in equities are certainly directly applicable 

to other asset classes that are traded on exchanges or 

exchange-like structures. Moreover, it allows them also to 

find that liquidity or assess its relative value and then decide 

whether they take it or not. In that regard, you’re seeing a 

lot more sharing of tools and techniques and understanding. 

We also able to link together some of the more esoteric 

bits of what happens in other markets and how they affect 

equities and vice versa. Therefore, I would say that there is 

definitely convergence of understanding underway; but, at 

the end of the day, there still has to be specialisation, which 

will remain for quite some time. 

CHANGING ECONOMICS in THE 

BUY SIDE/SELL SIDE RELATIONSHIP 

FRANCESCA CARNEVALE: Is there a new understanding 

of the need to pay for consumption and resources in such 

a complex and changing trading environment? 

ROB KAROFSKY: Yes, absolutely and speaking for our 

firm, more so than ever. As liquidity is scarce, so are some 

sell side resources. I truly believe that we all make money 

together in this industry and we all lose money together in 

this industry, meaning that obviously there are divergences. 

In general though we’re all going through a difficult time and 

the sell side will have to do some hard facing of facts in its 

efforts to try to figure out an effective business model and, 

at the same time, how to scale their operations to provide 

and service varying levels of volume and volatility which are 

key drivers of revenues. Moreover, as we are about to deal 

with massive regulatory change which could at some point 

also cut off some key drivers of revenues for the sell side, I 

wouldn’t be surprised if we get to a model where the sell side 

61

62 


are demanding some sort of operating margin with their buy 

side clients, which is something that we may have to deal 

with at some point soon in the future. The days of subsidising 

one business for another business are, given current circumstances, 

going to be far and few between. We are very 

well aware that there’s no free business anymore. We have 

bills to pay and we need to make sure that we’re paying the 

people. We are very focused on it right now and our list has 

shrunk, which if everyone is working in this way, ultimately 

has important consequences for the market. I think it is inevitable 

that people at the top of the food chain will, overall, 

take more business because of these changes. 

That being said, we need to be relevant to people that we 

believe add value to us and deliver resources that help us 

make money, period. Miranda was talking about broker lists 

and things like that. Yes, we are becoming very aware about 

whom we’re doing business with and why we’re doing 

business with them and how we are paying those people. It 

is an important initiative that’s going on at our firm and I 

would imagine right now that it is an important initiative 

going on at every firm. 

MIRANDA MIZEN: It is absolutely true that the buy side 

needs to know who they’re paying and why they’re paying 

them. We have already seen broker lists being curtailed, and 

similarly brokers have to make decisions about the client 

segments they want to service. This looks set to continue in 

the current environment, and some of those consequences 

will be positive. Do we need, for instance, so many dark 

pools? Well, if we don’t and liquidity continues to form in only 

some of them, then others might naturally fall by the wayside. 

Natural competition might solve some issues of fragmentation 

and cost. So many people are electronically connected. 

Those connections cost money even if it is not in a pure 

payment form. Even so, they still accrue maintenance costs. 

Inevitably then, there is a lot of attention being paid to those 

hidden costs of doing business, of just having these connections 

and how you deploy your resources within the company, 

which then dictates what you’ve got left for some of those 

more innovative and discretionary and interesting projects, 

other than just trying to meet the next regulatory deadline. So 

much more is now visible in a way that it wasn’t five or six 

years ago in terms of explicit and implicit costs, in terms of 

bundling and unbundling, in terms of the way things are 

allocated, who they’re allocated to, why they’re allocated. 

CURT ENGLER: Obviously, there are implicit and explicit 

costs. Tackling implicit costs will always be a battle. As for 

explicit costs, clearly the sell side is under some considerable 

pressures, given the backdrop of the market. That said it is 

not sustainable to have 100% loss ratios or have the sell side 

not earning a return. With that in mind, what’s in store for 

the future? It could range anywhere from a cost plus type 

model where if we have fixed tags that we know exactly the 

cost implication if we’re adding or taking liquidity. That’s a 

significant swing in the profitability of execution on the 

explicit side. Then again there is the whole range of services 

that the sell side provides. It is just determining, accurately, 

what is that actually worth? If in practice it was easy to just 

Miranda Mizen, head of equities research, TABB group. Photograph © 

FTSE Global Markets, supplied July 2012. 

come up with a ledger of the costs involved and the revenue 

needed to cover those costs, it would all be simple. Life unfortunately 

isn’t that simple. Now there could be a whole 

host of other unintended consequences from applying a 

cost plus model, but to me it makes sense. 

What’s happening in the trading world and in financial 

services in general, in this post 2008 period, is really not all 

that different from what’s happening in just about every 

other industry in our economy; whether it is automobile 

manufacturing or airline seats. Technology has been a highly 

disruptive influence, margins have collapsed for a lot of 

reasons and there is a fundamental restructuring going on 

in the marketplace, and it is happening both on the buy side 

and sell side. Buy side desks are much smaller and more 

efficient than they’ve ever been and the sell side is working 

aggressively to become more efficient as well. This is part of 

the natural evolution of things and trading desks have to face 

this issue and deal with it. 

ROB KAROFSKY: The sell side equity business model has 

always been inefficient and that’s why they talk about specialisation. 

The sell side has layers and layers of specialisation. 

If you look at touch points, it is electronic, it is 

programme, it is cash, it is derivatives, it is research sales, it 

is speciality sales; it is just on and on and on and on. And this 

in a business that is 100% about picking up pennies and you 

need to do everything to pick up that penny! As Jose 

mentioned, this environment could provide the catalyst to 

finally change the business model and help evolve it and 

move it on to the next level. There’s always been a concern 

and I’m guilty as well, of moving ahead of your clients, the 

people that are paying you. It has always been a concern. We 

may be at a point now where you have to take that risk of 

changing your approach and business model in order to 

preserve or drive profitability over the longer term. Change 

is coming firms that are facing up to that change and 

respond to it as Jose describes, will be the winners. 

JOSE MARQUES: These changes are gut-wrenching 

whenever they happen. As Rob says, there will be clear 

winners and losers. But the story is the same in other industries. 

They have had to make wholesale changes and they are 

now benefitting from those changes. In the 1980s you could 

hardly get me to rent an American car, let alone own one. 

Now American cars are fantastic; cars coming out of Detroit 

are now on par with anything being produced anywhere in 

the world. Similarly in our industry, we are now forced to 

look hard at what we do and why we do it. What you’ll ultimately 

see is a much, much more efficient, better and more 

transparent trading environment. Though it may be a few 

more years for this play out fully, change is a reality. ■

FTSE Global Markets - Autobahn - Deutsche Bank

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