Yesterday, StreamBase hosted a webinar entitled “The 5 Best Practices of Execution Consulting Services” - an interview with StreamBase CTO Richard Tibbetts and Stephane Loiseau, Managing Director and Head of Equity Execution at Société Générale. The session described an important trend in the capital markets - the rise of execution consulting services (ECS).
ECS is defined as a sell-side service that helps buy-side clients achieve greater trade performance and efficiency. As electronic trading space gets more competitive, broker-dealers like Société Générale need to differentiate their trading services from their competitors. ECS is where the rubber meets the road, and provides the link between a broker and their clients to help them understand the market, market data, improve their trading performance and achieve their benchmarks.
ECS isn’t just one person’s job - it requires a mix of trading, technology and people. The 5 best practices Stephane presented are:
1. Find the Right People for the Job. Staffing the ECS function is one of the biggest challenges Stephane has at Société Générale. Today buy side has become more sophisticated with the use of electronic trading. They are not only familiar with the self-service tools and algorithms provided by sell-side, also exploring new technology and strategies internally. The expectation of ECS has increased. ECS used to be simply a technology job, because algorithms were new, and the service was new. But over the years, the trader’s role has evolved. An ECS team needs staff with a background in trading, but someone with experience in trade operations is critical to help understand the processing of an order from A to Z. Finally, the client relationship role is essential. Trading isn’t just about playing with technology; you’re interacting with the client to provide a service. Finally, there’s the intersection of these people skills and tools - the right ECS tools enable an ECS team to focus on providing great service. These people and tools are normally found in different organizational silos. So the best practice of ECS is to craft an ECS team with the right skills, team composition, and tools to get the job done.
2. Continually Re-Assess Market Micro Structure. Yes, the market is complex, liquidity is fragmented. These are true statements. But understanding all the aspects of microstructure can lead to better trading quality. If your ECS team understands where liquidity is coming from, what market events are affecting the market in real-time, and how speed affects trading, then they can help clients get better trading performance. For example, if your platform aggressively deals with dark pools in Europe, you can’t build trading strategies around where the liquidity is. The challenge is that market micro-structure knowledge has a shelf life of a few weeks. For example, if a venue changes its pricing structure, that’s a major event - that changes monthly. News changes daily. Market data changes in real-time. So best practice #2 is that ECS staff must continually re-assess market microstructure in order to help clients get the best trading results.
3. Establish a Dynamic, Real-Time System for Monitoring, Reporting, and Action. Historically, traders decided the actions they are going take, then carried on with those actions throughout the day, and results are assessed at the end of the day. This no longer the case - you need to do all of this in real-time. In order to accomplish this, ECS teams need a great monitoring system; it’s just too much data for the human brain to consume. At Société Générale, they analyze the market in real-time, based on microstructure and also macro level news events. But monitoring tools can’t be stale and static, which is why a robust alerting system is so important - you need to have some form of triggers that will help you know when to change your strategies - they could be based on volatility, or any other metric the ECS team decides is important on that day, or moment. So Stephane’s third best practice is to provide killer tools to the ECS team to monitor, assess, and adjust trading strategies in real-time.
4. Find a Balance Between Technology and High Touch Human Interaction. Over the last month, where volumes have been so low, Société Générale’s ECS team has adjusted the trading triggers they consider. ECS is not just about low touch (fully algo trading, all technology based) or just high touch (human trader interaction); these models are converging very quickly. Now ECS teams provide a lot more human interaction to change an algorithm, tweak their parameters, or help a client change their strategy as conditions change. For example, if you have an order for a client, and you start to work the order with an algorithm, and you can see there is an opportunity to cross the order on the floor, you need to call the customer and ask him or her if you want to close the cross. So you are seeing an opportunity, consulting with your clients, and saving them money. Another example is if the algorithm is not performing the way it should be - this is when the ECS consultant would reach out to the customer - should we split up the order into 2 and work them independently? So the fourth best practice of ECS is to strike a new balance between high and low touch service.
5. Understand that TCA is a Process Throughout the Trading Cycle, Not Just a Metric. Stephane feels that the notion of TCA must transform from an end-of-day metric to a trading lifecycle driver - the ECS team must think about the TCA throughout the lifecycle of trading. The ECS team must think about how their actions will affect the TCA grade you want to achieve. Then actions should be made carefully based on your data, which tools you use, which venues to trade, and so on. For example, on a specific order, the ECS team can decide to work a million shares on its own, but also to drop 500,000 in a VWAP algo for 2 hours with a specific metric just to make sure they are participating in the market. And the team must constantly monitor and adjust that strategy during the day with their monitoring tools (best practice 3). Stephane provided another simple example - when the trading day gets really busy, ECS staff can put more flow into the algorithm than manually trading. So you’re going to use data from previous days and from real-time to make your decisions and use as much data as you can throughout the lifecycle of the order. So changing the way the ECS team views TCA is the fifth best practice of ECS.
The session concluded with some Q&A, including how Stephane views ECS developing outside of the U.S. and Europe, how important it is on the trading floor, and how customized algorithms fit into the ECS strategy. For the Q&A, and to hear the full interview, click here.