Best Buy-Side Trading Desk: Invesco
MARKETS MEDIA SPOKE with Kevin Cronin, managing director and global head of trading at Invesco, via telephone on Jan. 27.
Markets Media: Please discuss your role and responsibilities.
Kevin Cronin: I’m responsible for the global trading activities of Invesco, ex-some elements of the fixed income. This includes equity, equity derivatives, FX, other derivatives, and commodities.
It’s a global desk. We have just under 50 traders on nine desks in seven countries. We have trading desks in Hong Kong, Tokyo, Taipei, Melbourne, Houston, Atlanta, Toronto, and one desk in London and one right outside of London. The overall AUM number for Invesco is about $800 billion, and probably at least two-thirds of that is within my purview. I’m coming up on my 17th year with the firm.
MM: What is your approach to the job and what is the ethos of your group?
KC: We believe that the implementation component (trading) of our investment processes is an essential element of our diverse investment processes. While there is a clear fiduciary requirement to do so, we also strongly believe that implementing our investment strategies diligently and effectively can be the difference between median performance and top-quartile performance over time. As such we spend a lot of time and energy making sure our implementation processes are highly efficient, effective, and continuously evolving.
We’re a very diverse company. We have trading strategies ranging from highly active mutual fund managers, who are more single-stock oriented, to highly complicated quantitative strategies, which are more portfolio-trading oriented. We also have a large ETF business, PowerShares, which is very focused on efficient, value-added implementation strategies.
All these diverse trading styles required to be effective boil down to a common philosophy, which is if we do this well, we can add substantial performance to our clients’ outcomes over time. We spend a lot of time and energy making sure we are employing the right technologies, people and processes. We also spend a lot time evaluating these elements and, where necessary, we make appropriate enhancements.
Regarding talent, we spend a lot of time making sure that we have the right people in the right seats. Over the past year or so we have undertaken a process to radically enhance the skill sets of our traders which we believe will be essential requirements to continue be highly capable at this vocation.
MM: Can you elaborate on how traders’ skill sets have changed?
KC: Our evolution as a buy-side desk comes down to how the markets have evolved. Ten years ago with the New York Stock Exchange or even Nasdaq, so much of the trading activity happened at a single point of sale. So our ability to get outcomes that were consistent with what our expectations were, were much better. The way to do it well (differentiated) was to have really good traders who understood how to negotiate large block trades, but also understood nuances like the value of understanding the layout of the floor of the New York Stock Exchange.
Which stocks traded at which posts? Who were the specialists in the different stocks, and what were their strengths and weaknesses? Who the closest floor brokers for when we needed immediate access to the crowd? Who were the guys favored by the various specialists, who had an advantage in the crowd? The point is that there was substantial benefit in really understanding the infrastructure, and getting good outcomes was about stacking the deck with the right traders who had good negotiation capabilities, were good at playing this game of poker, and who also understood, very well, how the system and the game worked.
In some higher philosophical sense, things haven’t really changed that much; that is, adding value in the implementation process is still about differentiation. Of course where you find this differentiation, and what you have to do to achieve it has changed dramatically.
Today there are 13 exchanges and around 50 other destinations where trading occurs, thus there is fragmentation at a level that very few, if any, markets have experienced over time. So a trader’s ability to get highly differentiated outcomes for clients is not just about trying to negotiate a price; it’s really about being able to find pockets of liquidity without giving away information that could unduly impact the price of the stock. Today’s execution landscape is not as simple as going down to a single point of sale, or understanding floor diagrams. Rather, finding liquidity effectively is now dependent upon the trader’s ability to understand and navigate through what has become a complex labyrinth of different execution destinations, from dark pools to ECNs to ATSs to exchanges. Even when armed with capability there is an additional layer of complication related to different exchange/venue order types, order routing decisions, different market participants’ behaviors, etc.
MM:How has the risk of information leakage changed the business of trading?
KC: It has become almost like a spy novel, wherein value is achieved through knowing more than the next guy and protecting information through clandestine trading strategies. Do appreciate that we have very large orders and the information about these orders can cause an imbalance in the supply and demand dynamic, and ultimately in the price of the stock. Also, there are new participants in the marketplace, such as high-frequency traders (HFT), described by some as the modern-day market makers and others, who would love to have this information. These participants use a wide variety of sophisticated trading strategies, speed and access to uncover large institutional orders. So we have to be very careful about who we talk to and we have to be very smart about what we are doing and where.
So in this respect it’s a different game. We are therefore spending a lot of time evaluating and hiring people who can help us better navigate the labyrinth through the use of new trading technologies and strategies, and on people who can help us analyze the value of our outcomes — primarily through the use of our own proprietarily developed transaction cost analysis tools.
We recently hired a high-frequency trading developer from one of the largest HFT firms in the U.S. with a Ph.D. in Applied Mathematics, and we are in the process of hiring another Ph.D. in our trading research group. Our recently hired global head of electronic trading used to be head of consulting for AES at Credit Suisse, and he is in the process of getting his Ph.D as well. Mutual-fund companies like ours have not historically been buyers of that kind of talent, certainly not on trading desks.
We are beginning the process of developing our own trading algorithms, and we have done a lot of work creating our own order-routing paradigms and cadences. We’ve spent an enormous amount of time with exchanges and other venues, getting to know the different order types and how we can use them more effectively. Where appropriate, we have worked with exchanges to help develop new kinds of order types that better suit institutional investors.
A trader may have a gut feeling about how to pursue liquidity and how a trade went, but we really need to back these gut feelings up with data. Making more data-led decisions, being consistent around implementing new and innovative trading strategies, measuring the efficacy of the outcomes, and then continuously improving the process is how we believe performance differentiation is achieved in the implementation process today. We’re doing this with U.S. equities and increasingly with FX, futures, and other things we trade.
MM: What were the highlights of 2013?
KC: Our primary objective in this or any given year, month, week, or day is to make sure our clients’ orders are handled in the best possible way and we’re getting the best possible trading outcomes on their behalf. I believe beyond any shadow of doubt that we have accomplished this objective in 2013 and historically.
On the market-structure front, the organization and I personally have been involved in ensuring that our clients’ interests are well understood, articulated, and protected in the various market micro-structure debates again in 2013.
Last year we participated in the SEC roundtable on decimalization and I was part of a group that gave a recommendation to the U.S. Treasury on market structure. We continue to be thought leaders in pushing for the best interests of our clients, and, by some extension, for the institutional-investor community at large.
We’re trying to be more thoughtful and more informed about how we perform, and take all the necessary cues from that understanding and insight to get better.