Seeking Depth


Axa IM trading head Paul Squires talks liquidity, technology, and regulation

There are always boats going in and out to sea under the bridge of the buy-side trader, but the water level is not always high enough for a vessel to get through.

Paul Squires monitors the tide of the markets as head of trading for Axa Investment Managers. Amid ever-changing technology, regulations, and market cycles, Squires said his core task — finding the other side for large trades — is immobile.

Paul Squires, Axa

Paul Squires, Axa

“In areas of each asset class, there is very good liquidity, but often in certain areas of each asset class, there are areas of very poor liquidity,” Squires said. “The constant challenge for us is being able to execute institutional-size orders in markets that have volatile liquidity.”

Squires heads up a team of 31 buy-side traders, located in London, Paris, and the New York suburb of Greenwich, Conn. Paris-based Axa plans to station a trader in Hong Kong by year-end. By asset class, 17 Axa traders work in fixed income, 8 in equities, 4 in money markets, and 2 in foreign exchange; derivatives of each class are traded as well as cash instruments.

Axa managed €568 billion ($770 billion) as of June 30. The company ranks as the 16th-largest global asset manager, between Goldman Sachs Asset Management and Invesco, according to recent research conducted by Investment & Pensions Europe.

“The constant challenge for us is being able to execute institutional-size orders in markets that have volatile liquidity.”

Given the increasing complexity of today’s buy-side desk, including technology and compliance hurdles, size has its advantages.

“It is getting expensive to run a buy-side trading desk,” Squires told Markets Media in a Sept. 27 telephone interview. “The outsourcing of middle- and back-office operations has clearly been a trend in recent years, and to extend that and bring in outsourcing of execution whereby the execution desk takes on the regulatory burden and the cost of technology, I can see why smaller asset managers feel that is a very commercial way of restructuring their organization.”

“There are clearly economies of scale” to the business, Squires said. For instance, Axa can provide clients performance-measurement tools such as key performance indicators (KPIs) and benchmarking across asset classes, as well as systematic transfer plans (STPs). “It’s pretty tough for a small asset manager or a small buy-side trading desk to deliver that operational infrastructure, which also delivers execution performance.”

Veteran Hand
Squires, 43, has two decades’ perspective on how buy-side trading has evolved. He started his career as a trainee U.K. equity trader at Mercury Asset Management, which was later bought by Merrill Lynch Investment Managers, which was bought by BlackRock. In 1996 Squires joined Sun Life Investment Management, which was later bought by Axa.

Squires traded U.K. and European equities into the early 2000s, when he established a small fixed-income trading desk and moved into an oversight role for a team of stock and bond traders in London. In 2005, Squires’ current boss Christophe Roupie was brought in to merge the London and Paris trading teams and include that group in Axa’s newly formed Trading and Securities Financing unit. Squires became head of trading, which entailed adding the Paris fixed-income team to his responsibilities, and then two years ago Axa’s Greenwich trading team was brought into the fold.

There have been massive changes in how institutions go about buying and selling securities since 1993, with the core change being the evolution from largely manual processes to an automated system. “Technology has been at the center of the development,” Squires said.

Specifically, Squires points to Axa’s order management system, which was used by equity traders as far back as 2001. “The strategic vision was to deliver the same kind of operational platform for the other asset classes,” Squires explained. “On fixed income for example, traders were used to using RFQ (request for quote) platforms on a stand-alone basis — MarketAxess for corporate bonds and Tradeweb for government bonds. But when you have a stand-alone platform, there is risk of manual error on entry and execution, so we moved fixed income onto the OMS.”

From there, a Financial Information Exchange (FIX) connection linked the OMS to the RFQ platforms, “so when a fixed-income trader acknowledges an order from the fund manager, the only direction and nominal size he can execute on the platform is the exact parameters that have been sent by the fund manager,” Squires said. “That was a fairly clear operational-excellence objective of mine, because for all the brilliant 99% of trades that the trader executes, the 1% they get wrong can undo all of the good stuff.”

Squires and his team have since applied the same process for foreign exchange and listed derivatives. “That technology was very key to our operational platform,” Squires said. “It hugely reduced the number of trading errors that used to characterize buy-side dealing desks to some extent.”

Another secular evolution cited by Squires — which fits with the notion of buy-side trading desks needing scale — is greater in-house responsibility and self-determination.

“A lot of decision making is done by the buy-side trader now before they pick up a phone or send an order to a broker,” he said. “You used to ring up the guy you trusted and tell them what you were looking to do, and you would discuss a strategy. Now, there is so much due diligence and analysis before it gets anywhere near the market.”

The buy side has become more empowered partly by necessity, as the past five years have not been kind to the sell-side banks whose job it is to service the buy side. From the Lehman Brothers collapse and ensuing global financial crisis of five years ago, to tepid trading volumes and tighter regulations today, the sell side simply doesn’t have the capacity of years ago.

Still, after moving a good amount of equity-trading business four to five years ago to smaller, motivated and opportunistic brokers, Squires said the ‘bulge bracket’ has more recently regained its footing, even if the footprint is smaller.

“People anticipated (using smaller brokers) being something of a paradigm shift and becoming the new model,” Squires said. “But what happened very quickly was the bulge bracket replenished itself, and although staffing levels haven’t got back to pre-Lehman levels, they started to bridge the gap a bit more discriminately, with quality rather than quantity. So we have seen a return to more traditional patterns of where we were doing business.”

The sell side has become more quantitative and tech-savvy, in step with the requirements of electronic trading that include algorithms and smart order routing. Squires said he’s also noticed more sell-side cost control, manifested by consolidating offerings. “What they are trying to rein in is multiple contact points for any particular account, which I think is reasonable,” he said.

“We’ve responded to that as well and tried to be very clear with our brokers who have different types of coverage, about the type of person we want,” Squires said. “Our trading DNA is such that although we do some algorithmic trading and a significant amount of programme trading, we see ourselves as liquidity-seeking single-stock traders in essence, and for that reason we like to have a very strong relationship with a cash equity sales trader. We’re less concerned about picking the phone up to somebody who is going to tell you which algorithm to use.”

New Regs Ahead
Squires, a native of Surrey in south London, runs, cycles, and plays football, while as a spectator he supports the Crystal Palace and Manchester United teams. Married with two children, he enjoys loading up his Volkswagen Camper Van and going away with the family.

But during business hours Monday through Friday, his focus is on ensuring Axa trades as efficiently as possible, which in turn preserves investment return for the pensions and other institutions that make up its client roster. And there is no shortage of current-day challenges to the mission.

Regulation is one issue. New rules put forth in Europe and the U.S. over the past several years haven’t had institutional managers as a focal point, but Axa and cohorts are indirectly affected when initiatives such as Markets in Financial Instruments Directive II, Basel III, and Dodd-Frank discourage other market participants from trading.

“You could argue that is not such a significant change in terms of trading equities, but in terms of trading fixed income, it’s a huge change, because if banks are more constrained from using their own balance sheet to provide liquidity in an OTC market, the chances of us executing illiquid bonds are significantly reduced,” Squires said. “Basel III has had a big impact on fixed income trading.”

“In equity trading you’ve already seen the consequences of MiFID I, which is — if you want to spin a positive answer — that there’s increased venue competition to the former monopolistic primary exchanges, and you could argue to some extent that execution costs are lower,” he continued. “But if you want to put a negative spin on MiFID I, you would point to the fragmentation of liquidity due to multiple venues, plus an increase in high-frequency trading, plus the increased opacity of trade reporting.”

New regs or no new regs, the desk trader’s task of getting best execution for each transaction is the same. “It is much more for me, as head of a trading organization, to make sure that we build a framework that meets all regulatory requirements,” Squires said. “The difficulty of that is not just interpreting regulatory detail, but also finding a way of implementing delivery of that within a certain budget, because higher regulatory demands equal higher costs.”

As central banks continue to wield massive influence on markets, macroeconomic themes are arguably more significant than ever for buy-side traders, especially in bonds and foreign exchange. The biggest variable is when and how the U.S. Federal Reserve will begin to decelerate its program of quantitative easing.

“We call it ‘Fed watch’ — which speakers are up, what they’re saying, and what is the interpretation with regards to tapering,” Squires said. “That is absolutely what the market is hinging on.”

“Also, some of the things in the background that haven’t gone away continue to pop their heads up,” he continued. “For example, the fiscal agreement in the States is something that needs to be resolved, and as that gets closer and closer to the biting point, it’s a big factor. To some extent the European sovereign debt crisis seems to be calmer at the moment, but Portugal, Spain, Italy etc. are not quite put to bed.”

Performance Measurement
Squires said Axa has used transaction cost analysis for more than a decade, and efforts to improve and deepen TCA and extend its distribution are ongoing. The firm has expanded its TCA beyond equities to FX and bonds.

“We need people to be investing in the markets before we discuss how we execute or anything else.”

“We have a daily best execution report, which…systematically checks our execution prices against what was going on in the market,” Squires explained. “If the execution performance is outside a certain threshold, traders are required to comment as to why. That serves a regulatory requirement, but it also means the trader has a very instant recollection as to what happened.”

“Beyond that the most useful analysis we do is on a monthly basis, whereby we have a whole subset of execution results that can be split by investment team, market, broker, trader, portfolio manager, or any combination,” he continued. Beyond that, “on a fairly systematic basis, I will sit down with my heads of equity trading and we’ll go through the results”.

Going forward, Squires is looking for some positive changes to emerge from the raft of regulatory initiatives, specifically a European consolidated tape for listed equities, more transparency in fixed income and FX OTC markets, and fewer exchange order types.

“These are all things where I think the regulators need to step up,” he said. “But, there is a balance between enforcing market structure and eliminating opportunity for innovation, which clearly the markets and investors need.”

“If you take a step back from some of those quite specific examples, what you really need is for investors to have more confidence in financial markets,” Squires concluded. “That’s something that clearly has been damaged in recent years and we need to find a way to restore that confidence, because that’s really the front line of what we do. We need people to be investing in the markets before we discuss how we execute or anything else.”

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