Asset Owners Upgrade Trading

Terry Flanagan

Buy-side investment managers are taking a more active role in their trading operations. One rung higher on the food chain, institutional asset owners who act as their own managers are also equipping themselves with the technology, processes and people needed to enable efficient buying and selling of securities.

“We have been empowered by technology for several years, allowing our traders to exercise significant control over any given trade,” said Stephen Fitzpatrick, passive portfolio manager and trader at Colorado Public Employees’ Retirement Association, which oversees $47 billion. “We achieve this through the use for electronic trading, which accounts for the majority of our active trading flow.”

“The changes in electronic trading over the past few years have been evolutionary, not revolutionary, as we were already exerting a high level of control,” Fitzpatrick continued. “Still, new algorithms have allowed for improved trading strategies and even more opportunities for buy side-directed trading.”

Colorado PERA manages more than 55% of its assets internally; by asset class, about 80% of the fixed-income allocation and 65% of equities is run under the roof of the Denver headquarters. Overall, the internal management is more than double the average of about 25% for comparable U.S. pension plans.

Colorado PERA Exterior

The Colorado PERA building (Photo courtesy of Colorado PERA)

There is a trend — albeit gradual and uneven — for large public pension plans to ‘in-source’ their investments, or at least consider pulling in some capital from external managers. For the asset owners that are already managing their beneficiaries’ money, the movement is toward expanding in-house capabilities and relying less on Wall Street brokers to handle their trades.

Colorado PERA is a long-only, low-turnover investor, so trade volumes aren’t heavy. But given the size of the portfolio, minimizing trade friction adds up to real money saved on behalf of more than 500,000 active and retired teachers, state troopers, snowplow drivers, corrections officers, and other public employees.

Advances in analytics and technologies “provide a more detailed picture of our trading styles and the overall market structure,” said Stephen Komon, senior passive portfolio manager and trader at Colorado PERA. “This results in our traders being able to change tactics, such as trading aggressiveness, timing, and the use of price limits, to reduce impact and improve fill rates. We also have a better sense of which algorithms and which trading venues are most appropriate for a given trade, further benefiting the equity portfolio at PERA.”

Regarding efficiency, “our back office has empowered trading,” said Komon, a Chicago Booth alumnus who worked at Westpeak Global Advisors, JP Morgan and UBS before joining Colorado PERA in 2012. “Technologically, trade matching systems, like CTM, have streamlined the process of settling trades, allowing for increased capacity from a back-office perspective. In addition, we have also had the opportunity over the past few years to add talented professionals to our team, enhancing our ability to expand our internal management and to improve our trading flexibility.”

Afield from stocks and bonds, large institutional asset owners and managers are taking a closer look at foreign exchange transactions, which historically were conducted via privately negotiated voice transactions. As the FX market becomes more transparent and electronic, there are opportunities to enhance trade execution.

“In terms of foreign exchange, we have used the FXAll system for our transactional FX for a number of years,” said Fitzpatrick, who worked at JP Morgan and Bear Stearns in the 2000s. “The efficiency of this tool has allowed us to bring international equity assets in-house, saving management fees that would occur with outside management.”

Featured image via Yong Hian Lim/Dollar Photo Club

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