The Market Speaks

Terry Flanagan

As the name implies, the Markets Choice Awards are a function of what market participants tell us. Here’s a sampling of what they said this year…

Buy Side

The buy side is fragmented compared with the sell side or exchange space, as there are hundreds or even thousands of asset manag­ers and hedge funds competing to manage the money of pensions and other institutional asset owners.

But some buy-side consolidation has been observed over the past half-decade in the wake of the financial crisis, as allocators per­ceived more safety and less risk in going with the larger, more established ‘name’ players. In a broad sense, that has meant the largest asset managers and hedge funds thrived, mid-sized players held steady, and smaller and less-established managers found the business climate to be especially challenging.

That consolidation was reflected in what we heard from readers, as some of the big institutional brands received more than their share of accolades.

For example, we heard lots about Black­Rock, the world’s largest asset manager. An executive at a large institutional market maker said, “The most aggressive and vocal asset manager with regard to market structure and technology is clearly Blackrock. I don’t know if anyone is even close. To influence market structure and to be focused on technology, you need scale to show up on the radar screen.” Another market participant noted BlackRock has been a “leader on regulatory issues for two years.”

One senior sell-side executive praised a few other very large managers for pushing to stay at the forefront of institutional trading and markets. “Fidelity, Invesco, and Franklin Templeton have hired specific quant teams to re-evaluate and reassess their whole trading methodology, infrastructure and processes,” the person said. “Most of the big guys are sectorized and look like sell-side desks, but the trend is to stop most of the orders at the program trading desk, which then assesses what can be automatically executed and what needs more attention. Program desks are doing more and more of the flow.”

J.P. Morgan is at the forefront of this, trying to profile the portfolio manager’s alpha style with their execution,” the sell-side source continued. “They set the trend, now Fidelity, Wellington, Invesco, and Templeton are fol­lowing the same blueprint.”

Regarding Invesco, a trading-technology CEO cited the firm’s “out-of-the-box thinking and growth in assets under management, including their active and ETF businesses.” Another source said Invesco is “very forward-looking on market structure and in how they run their business, while another noted that trading head Kevin Cronin “is a smart guy and a focal point of their market-structure efforts.”

Franklin Templeton was called a “trading thought leader” by one market source. “I like Schroders,” said another. “Their multi-asset business is very innovative and impres­sive.” Another source complimented buy-side institutions based on individual trading savvy, such as AllianceBernstein (Dmitry Rakhlin, who is now with Goldman Sachs Asset Management), Allianz (Gary McAnly, for derivatives), Capital Group (Matt Lyons), Janus (Dan Royal), J.P. Morgan (Ben Sylves­ter), and MFS (“Jeff Estella is always looking at something new”).

Other institutional managers that earned praise include Capital Group, Neuberger Berman, Northern Trust, Oppenheimer, and State Street.

Public-pension funds in the U.S. aren’t gen­erally known for being on the cutting edge of technology and trading and investing meth­odologies. Canadian organizations such as Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan drew cross-border praise, and we heard about domestic organizations such as CalPERS and New York State Teachers. “In the pension world, NYS­TRS continues to be innovative and forward- thinking,” said one market participant. “They are pretty transparent in their processes and they maintain a high level of excellence.”

One smaller defined-benefit plan that punches above its weight is the City of Sac­ramento pension, which sells equity call options to generate income. That’s chocolate in a mostly plain-vanilla space, one market source observed. “The pension-fund space is a leading candidate for reform. I have had conversations around pension funds’ desire to implement some form of options strategy within their portfolio, be it on a protectionist basis or yield- enhancing basis,” this person said. “Sacramento was bold enough imple­ment that strategy.”

In the endowment space, one source said “I find Harvard Management very interesting because of the way they look at alternatives. They have their own model of investing and they are extremely successful.”

Similar to the institutional space, some of the biggest and longest-established hedge funds were prominently mentioned in our Markets Choice Awards outreach.

Commenters said Bridgewater Associates “has a strong position in the market” and “is not afraid to be different,” while another observed that “they are hard to understand.”

Fellow hedge-fund heavy AQR Capital Man­agement “continues to bring out new and interesting products,” according to a market source. “Just from an overall commitment level, I think they are one of the big players in the space. Another source cited AQR for its “performance, use of technology, and inno­vative models,” while another pointed to its “consistency and forward-thinking and inno­vative approach.”

Viking Global Investors “has revamped its desk — it’s now basically run by quants,” said one market source. “The trend is going that way, but it costs money to set up the resources to support it.” Elliott Associates “does it in the best possible way with the best possible risk-reward,” another person said. “They just get it, and they’ve been getting it for a very long time.”

Other well-known hedge funds that drew accolades include Axonic Capital, Canyon Partners, Citadel, D.E. Shaw, Greenlight Capi­tal, Marathon Asset Management, Marshall Wace, Millennium Management, and Omega Advisors.

For every large, established hedge fund, there are scores of mid-sized, smaller and emerging funds that aspire to move up the AUM ladder. We heard some interesting com­ments about lots of names below the top tier.

Ionic Capital is “pretty savvy, intelligent and on top of things,” one market source said. Mar­cato Capital Management “is an activist hedge fund that built their business over the past three to four years and has an excellent track record,” said another source. Emerging manager Sachem Head Capital Management “raised about $700M to get started, which is a good amount for this market.” Parallax Volatility Advisors “has taken advantage of the volatility play that’s out there right now and is very nimble within that space.”

Salient is “interesting in that they’ve put out a couple new products over the last year, including a risk-parity product has done well,” a market source said. “They are trying to bring institutional skill sets to the retail mar­ket.” Another person called 361 Capital “an innovator in the managed-futures space…They brought out a product that did particu­larly well this in a space that hasn’t done well.” Someone else noted Long Short Advisors offers an “interesting single-manager prod­uct — they’ve taken a hedge fund that histori­cally hasn’t been available to most investors and put a mutual fund around it.”

Regarding the Cassiopeia Fund, one source said “I don’t know that they’ve had a down year since inception. And the fact that they are utilizing the new asset class, volatility, as the benchmark speaks to their strategy.”

Other smaller and/or emerging hedge funds cited for excellence include Alcova Asset Management, Arlington Value Management, Claren Road Asset Management, Concourse Capital Partners, Deerfield Management, Highline Capital, Hildene Capital Manage­ment, Kovitz Investment Group, LBN Advisers, Phalanx Capital Management, Richter Bober Asset Management, and Turner Investments.

Funds of hedge funds have faced head­winds in recent years, but some firms caught the attention of our trusted market sources.

Lighthouse Investment Partners is “one of the best in terms of understanding the busi­ness, not just in terms of selecting managers, but also in terms of utilizing their strengths in the managed-account world,” one person told us. “They are more than a service pro­vider, they also have manager expertise.” RiverNorth Funds has “taken advantage of the opportunities in the closed-end market and had very good performance with consis­tent returns,” another person said. “They are unique in the fund-of-funds space.”

Sell Side

Bank broker-dealers had a generally difficult 2013, as trading volumes remained muted and new regulations took shape. But most sources we spoke with indicated that the big­gest Wall Street houses still deliver on their core mission of providing trading service and technology to buy-side firms.

Bank of America Merrill Lynch “does a won­derful job with their client relationships,” one buy-side source said. Another person likes­BoAML for its “fast risk checks and low costs”.

One hedge-fund source was less construc­tive on big banks, saying that dealing with them was a “headache,” they generally “over­promise and underdeliver,” and “they are all getting muddled down in credit and risk regulations.” On the bright side, this person said Goldman Sachs technology is “always the best,” and singled out agency broker and clearing firm Newedge for praise. “On the futures side, no one is better than Newedge, especially the guys out of the Chicago office,” the hedge-fund source said. “They have maintained a hugely loyal client base.”

Another buy-side source noted his rationale for deriving value from the sell side pertains to bringing disparate parts of the business together. “Given that we trade many different asset classes, it is useful to have one point of contact who may not be an expert in all the different asset classes that we trade, but is able to source all the resources on the bro­ker’s end to allow us to trade many different things from that one point of contact,” the person said. In that regard, “J.P. Morgan and Societe Generale have provided a platform and view that has been helpful.”

Barclays, Credit Suisse, Deutsche Bank, and Morgan Stanley also won mention for best overall bank broker-dealer. Wells Fargo gar­nered praise for fixed-income services, while Citigroup, BoAML, and Wells Fargo earned plaudits for municipal bonds specifically.

In the business of providing algorithms, BoAML, Barclays, Credit Suisse, and Gold­man won praise, though some market sources said there’s less differentiation in this area now compared with several years ago.

“We feel that most of the algo providers have converged,” said one quantitative-trading source. “We were one of the early adopters in the space, back when there was only ITG. Back then none of the major broker-dealers even had algos. These days everyone’s got a VWAP; the basic stuff is all pretty much iden­tical, and even with the more advanced pro­viders there’s not much difference.”

For U.S. market participants looking to trade across borders, there is no shortage of sell-side offerings. HSBC was singled out for praise for European trading: one source said “they are quite active in converging funding, clearing, collateral and treasury. That is the future of enterprise risk management in the industry.” Other firms praised for their trading services for European markets include Bar­clays, Credit Suisse, Deutsche Bank, Gold­man, J.P. Morgan, and Morgan Stanley.

For trading in Asian markets, Citigroup, Credit Suisse, and Nomura won praise; for trading in Latin America, Credit Suisse, J.P. Morgan and Scotiabank; in Canada, sources mentioned J.P. Morgan, RBC and Scotiabank.

Outside the white-shoe group that consists of the largest banks on Wall Street, Jefferies earned multiple mentions for overall quality. One fixed-income source said “The most cre­ative and the most innovative would probably be Jefferies. They’ve been the most open to thinking about market-structure change and how they can be involved in it, sort of as a non-incumbent.”

“The other broker-dealers, especially on the fixed-income side, are all in the mode of defending. They don’t want the world to change,” this source continued. “Jefferies is a non-incumbent and they’re smaller, but they’re growing and they’re aggressive.”

Another emerging broker-dealer to watch is Natixis Securities, according to one source. “They have made a lot of inroads in terms of having the banking model but staying nimble and staying accessible,” the person said. “They are very easy to work with, and they have a good grasp of the market place.”

Regarding prime brokerage for hedge funds, one source opined that Goldman is the top dog, but Pershing/BNY Mellon is an emerging competitor. “They are growing, and everybody at some point is going to touch a custodian account that’s at Mellon,” this person said. “They are a new, young group and I think that they give excellent service to their clients. Of course, it’s hard to beat reach the reach and depth of Goldman. We’re fans of both.”


Exchanges had a mixed year — a rash of highly publicized technological glitches put the sector under a regulatory spotlight, but advances in reliability and technology moved many competitors forward, and the year was capped with the tectonic merger of industry giants IntercontinentalExchange and NYSE Euronext.

ICE had more than its share of fans among market sources we spoke with. One source described ICE executives as “game chang­ers and market leaders,” while another (quite enthusiastic) person specified that his endorsement of ICE was “across the board” for all exchange categories. NYSE Euronext, which was a standalone exchange operator for all but 48 days of 2013, won plaudits for multiple categories, including best exchange, best exchange technology, and most innova­tive exchange.

Derivatives giant CME Group earned kudos, with at least one market source saying it was a preferred trading venue over rival ICE. “CME operates very transparently — we know how the exchange works and we know what the fees are,” said this Chicago-based proprietary trading executive. “We know how to access the exchange and the market data, the technology is sound, and when there are improvements to be made they consider our suggestions and more often than not we do see them implemented at a later date. We would like to see other exchanges give us that same level of cus­tomer service.”

A source at a mid-sized trading-technology cited CME’s exemplary customer service. “Even though we are a tiny company com­pared with CME, we have good access and good communication,” the person said. “They work with us in a very effective way, and they listen to us when we raise an issue. We want to commend them for understand­ing that that is part of what it means to be an exchange platform — actually working with the people who connect to you, not just man­dating that they follow your lead.”

Another person likes CME for their “zero tolerance for downtime and consistent innovation.”

Nasdaq OMX garnered praise for its core Inet technology, as as well as its innovation. Around the middle of 2013, Nasdaq launched NLX, a European interest-rate futures exchange, and also purchased electronic Treasury-trading platform eSpeed. “They are more agile with new products and services,” one person said. In the area of exchange technology, Bats Global Markets won praise. “They push the envelope with technology,” one person said.

One market source said Nasdaq and Bats are similar, from a technological perspective. “I feel like their systems are more transparent and more fair, which leads to a better pool of liquid­ity for all participants,” this person said. “They spend considerable effort maintaining their technology, which is really helpful, as it allows us to get responses to our orders more quickly and increases our efficiency and reliability.”

Regarding exchange innovation, one prop trader opined that 2013 was a year for the market to digest innovations rolled out in pre­vious years, rather than a big innovative year in itself. “The complexity of trying to manage all the innovations of the past is becoming an issue today,” this person said. Still, exchange operators such as Direct Edge and Chicago Board Options Exchange won praise for innovation.

Direct Edge showed “growth against the tide of off-exchange volume in 2013, a suc­cessful transaction with Bats, leadership on market-structure issues, and transparency with order-type presentation.” one person said. Another person praised the exchange company’s “EdgeRisk suite to bring risk management to the entire customer base, as well as the order-type guide and its easy online learning interface.”

Among options exchanges, CBOE earned plaudits for its focus on developing new prod­ucts and for its education efforts. “They are pretty innovative, constantly looking for new products,” one person said. “They are con­stantly on top of what is out there and how to make things better and serve the client’s needs. I have not seen a big change with the CEO transition to (Ed) Tilly. Tilly has a feel for the marketplace — he came from a trading back­ground, he understands trading, and he under­stands business. He’s perfect for the role.”

International Securities Exchange also earned kudos, in the areas of risk manage­ment, new products, and market leader­ship. “With the Goldman error on the options exchanges in August, one exchange that stood out and took a leadership role was the ISE,” one trading source said. “The prob­lem that came from that was that error trade practices were not harmonized. ISE was very communicative during the whole process and explained it in detail. They had a leader­ship role when it mattered.”

Another person liked ISE’s rollout of the Gemini exchange. “They have been some­what aggressive in terms of pricing their options for the betterment of customers’ flow,” this source said. “For example, as long as you’re adding and not taking liquid­ity, Gemini will pay you. This makes sense for someone like me who essentially is out there making markets and finding liquidity, always buying and selling options at various levels, either aggressively or not aggressively. It really works for us to be able to have that flex­ibility in terms of what our costs are going to be in terms of execution.”

Best M&A Deal

There were four market-related deals worth noting in 2013, according to our sources. Three of these were mergers: Intercontinen­talExchange – NYSE Euronext, Bats – Direct Edge, and Getco – Knight Capital; there was also the Goldman Sachs spin-off of execution management system REDI.

One person noted that ICE buying NYSE was “a historic event.” Another source likes the possibilities of the union, but will wait to see how the newly integrated company interfaces with market participants. “You never know how it’s going to impact fees, rebates, etc.” this person said. “Sometimes it’s a good thing — it will depend on how the transparency and integration works and what the ramifications are. At this early point, we don’t clients more or less apt to trade on ICE exchanges.”

One trading source finds Bats’ proposed purchase of Direct Edge more intriguing than the much larger ICE-NYX tie-up. “I don’t par­ticularly think NYSE or ICE has cutting-edge technology. I don’t really see the efficiencies other than consolidating flow,” the person said. “On the other hand, Bats has impressive technology, and Direct Edge has a history of good innovation. So I think that’s an interesting combination — with a good technology back end and the creativity that the Direct Edge guys have, it will lead to something pretty cool.”

Regarding Getco – Knight Capital, one tech­nology executive said the deal “pretty much saved two firms,” while another person called it “an impressive deal for Getco.”

The REDI spin-off was “innovative because it speaks to where the business is going,” one source said. “People are realizing that main­taining such a business is not a competitive advantage for banks, so they are willing to essentially outsource it. I think we’re going to see a lot of processing functions move to those kinds of models. Does every bank need a few thousand people in client facing middle office? Probably not. I doubt any bank would say, yes, it’s my middle-office person confirming the trade over Bloomberg that really adds value.”


The technology space can be tricky to get one’s arms around, as there are many cat­egories and lines between categories are often blurred. Also, technology providers range from large multinational companies to the proverbial two guys in a garage, so apples-to-apples comparisons are difficult.

But as always, our market sources came through with some good information, via both live interviews and online submissions.

Among execution management systems, Portware drew more than its share of compli­ments. “It does everything perfectly because it’s customized specifically for our needs,” one market source said. Charles River, Fidessa, FlexTrade, and ITG Triton also won plaudits in the EMS category, as did Bloom­berg and REDI.

Advent Moxy won props for best order management system. “It has allowed us to streamline our business,” one buy-side source said. “You enter trades, and every­thing else is automated. It has so many controls in place to make sure there are no mistakes, and it allows you to trade in so many different ways.” Other sources spoke highly of Bloomberg, Calypso (for derivatives), Edge, and Fidessa.

One buy-side trader likes Charles River’s OMS for its fixed-income capabilities. “I have been very impressed with the analytics in the new version 9,” this person said. “They are incorporating fixed-income benchmarks with associated characteristics. That sounds easy, but it will be a giant leap forward for my portfolio managers.”

Moving off the desktop, several providers of co-location facilities earned positive reviews, including Equinix and Savvis, as well as Digi­tal Realty and ITC. One source said CME’s co-lo facility in Aurora, Illinois is “shiny and new, but expensive.”

For risk-management systems, derivatives market participants praised Calypso. Mar­ket leader Bloomberg earned ample kudos as a data provider, but a surprisingly diverse group of competitors also were mentioned in this space, including Activ, Axioma, Barra, FactSet, Interactive Data, Markit, Northfield, Telemet. Markit has a “very strong position in derivatives,” one source said, while another recently switched to Activ from a bigger-name provider. “We made that change because of the breadth of data they have, the cost, and the technology,” that person said.

Best new product is always an interesting category within the technology space, as market participants look out for what may be the next big thing. While more than one source noted that 2013 was a comparatively slow year for new products, there is optimism that some new ventures have staying power.

IEX Group turned some heads since launch­ing a dark pool in October. “I think it’s going to change a lot, and they have a lot of buy-side and institutional support,” one source said. IEX’s senior executives are “really innovative guys, who get the space.” Another market source said “I would be hard-pressed to find clients who do not speak extremely well of those guys.”

Other new products or ventures cited by our sources include Bloomberg PolarLake, a managed-service model for enterprise data management; Liquid, a cloud-centric provider of hedge-fund technology; and a mobile risk platform offered by Nirvana Solu­tions (“if they invest in it, it might go far,” said one source).

Kensho was another new venture deemed promising by market sources. New product – Kensho. “If you’re trying to understand a port­folio you

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