Paging Liquidity


Trading volumes are lower across most financial markets, and market structures are more complex. The combination has made sourcing liquidity especially challenging for the buy side, at a time when protecting return in an alpha-scarce market is critical.

Dmitry Bulkin spends his days working on this challenge as director and head of liquidity strategy for equity trading at Credit Suisse, a leading Wall Street firm.

Bulkin joined Credit Suisse’s Advanced Execution Services group in 2003 from Kiodex, an energy-derivatives firm, where he managed the firm’s product development. Prior to Kiodex, Bulkin was at Credit Suisse First Boston, where he worked on a system to electronically trade government bonds. Mr. Bulkin earned a B.S. in mathematics from the University of Minnesota.

Markets Media interviewed Bulkin via telephone on March 19.

Markets Media: Briefly discuss your role as head of liquidity strategy.

Dmitry Bulkin: I’ve been with Credit Suisse for ten years, mostly working on algorithmic development. Recently I took a new role as the head of liquidity strategy for the equities trading department. In this role, I am responsible for managing relationships with the firm’s liquidity providers and partners, such as exchanges, alternative trading systems and other broker-dealers. I’m also deeply involved in managing our two alternative trading systems, Light Pool and Crossfinder, and I participate in forming our market-structure policies — that is, anything and everything that has to do with market structure.

MM: How would you characterize institutional markets currently in terms of liquidity, and how has that changed over the past few years?

DB: In general, institutional investors are finding that their execution costs are very low by historical standards, and spreads are tighter. But of course there are some challenges, especially moving low-cap and less liquid names, and a lot of people are concerned about the general complexity of the markets and equity market structure.

MM: What are the main challenges for the buy side in sourcing liquidity?

DB: The most challenging issue from a liquidity point of view is finding blocks, and moving large pieces of merchandise and less liquid names. This is where our cash desk comes in, where we provide capital to clients. On the electronic side, the most difficult issue for the buy side is probably mitigating the complex market structure, and finding partners on the sell side to help navigate market structure and help choose sources of liquidity that will benefit their end execution.

MM: What are your current initiatives in the area of liquidity?

DB: On the electronic side, we are exploring some new ideas with Light Pool, which is one of two active equities electronic communication networks. Light Pool, which is a unique trading venue, was created as a market center where the quality of the flow is the most important parameter, and we control the quality of the participants using a proprietary quantitative scoring methodology.

On the cash side we’re also doing some new and interesting things. We’re using some innovative hedging techniques, utilizing some of the models developed by our quantitative group. It allows us to better manage risk, and as a result, allows us to be more nimble in providing capital to clients.

MM: What does Credit Suisse do differently/better in the area of liquidity strategy vis-a-vis other banks?

Dmitry Bulkin, Credit Suisse

Dmitry Bulkin, Credit Suisse

DB: Dan Mathisson, head of U.S. equity trading, oversees both our cash and electronic desks. There are strict Chinese walls between the cash desk and electronic desk, but we’ve seen that some of the best ideas developed on the electronic side can be applied to the cash side, and vice versa. Having him oversee both allows for a better flow of ideas. He became head of both desks about a year ago and it has already paid dividends in the form of market share.

Also, in our Advanced Execution Services group, we are currently improving the way our trading desk interacts with clients. Moving from low touch to medium touch, members of the AES trading desk are starting to be proactive in reaching out to clients with market color. However, we have no plans to ever shop AES orders or for high touch sales-traders to see AES flow. As we like to say, what happens in AES, stays in AES.

MM: Discuss the pros and cons of the proliferation of order types.

DB: There are hundreds of unique order types out there. Looking at this in the context of a complex market structure, the for-profit exchanges are fighting for market share and trying to maximize their market-data revenue.

The order types can roughly be divided into two main categories. There are order types designed to incentivize a trader to keep an order on the exchange’s book to gain market share, and there are also order types designed to attract routable order flow to the exchanges. The sophisticated players use these complex order types for different reasons. Some use them to gain or preserve priority in the exchange’s book, others to guarantee a particular economic outcome in the context of a maker-taker model. Most of these order types are not necessarily bad, but we certainly think that the order-type proliferation has gone too far and it needs to be addressed. There seems to be an industry consensus on that.

MM: Is the current market structure too complex, if so how can it be simplified?

DB: In addition to more stringent order-type controls, we think that it is likely a good idea to move a lot of complexity from the exchanges to broker-dealers, who are not immune from liability for technical malfunctions. In general, we think exchanges should serve the main purpose of being a simple, reliable and transparent way for buyers to meet sellers for trading.

Obviously there are a lot of differing opinions on how to improve U.S. equities markets as these are very complex and difficult subjects, but in general we think that regulators should take a very measured and careful approach to any changes that are implemented in the markets, because the market structure is very fragile. We advocate for implementing pilot programs with pre-defined benchmarks of success and failure. Recently, our quantitative group started working on the Transaction Cost Index for institutional clients that we think can be used as a proxy for the quality of the market. This is just one example of a potential scientific approach to changes in market microstructure.

Confidence in U.S. equity market structure by buy-side market participants

MM: Please provide an update on Light Pool. Is it seeking to become an exchange as has been reported?

DB: LightPool is a displayed market from Credit Suisse, which was designed with simplicity, transparency, and fairness in mind. It doesn’t have any complex order types and its market-data feed contains only quotes and no print data. We have not finalized our strategic plan for Light Pool. Becoming an exchange is just one idea on the table. One thing is for certain — we want to keep Light Pool uniquely tailored for the needs of the long-term investor, where the quality of flow matters the most. Whatever we do with it going forward, it will be done with this main objective in mind.

MM: What are new or developing regulations are meaningful for your business and for your clients?

DB: In terms of market structure, there are two important regulations coming out. One is limit up/limit down, which starts in April. This should make markets more robust, and lower the chance of an unexpected, dangerous meltdown. The other regulation that was recently proposed is Reg SCI. The purpose of this proposal is to establish procedures around software development and technology of big exchanges and ATSs, as well as certain rules for handling outages. While we support the main objectives of Reg SCI, we hope that the final implementation will be reasonable and not too onerous on market centers.

MM: Discuss what you see for the future of liquidity and liquidity sourcing.

DB: Clients will ask for more stringent venue analysis, and ask more questions about broker’s routing choices. More attention will be paid to quality of the service from the electronic desks and execution consultants. On the cash side, the buy side will expect us to continue to be a real partner in terms of providing capital to them.

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