As the name implies, the Markets Choice Awards are a function of what market participants tell us. Here’s a sampling of what we heard this year…
The buy side is more fragmented compared with the sell side or exchange space.
First, the buy side is tiered. Institutional asset owners, who may manage some or all of their money in-house, are at the very top of the pyramid; large institutional money managers, who invest money on behalf of asset owners, are next; then come large hedge funds and midsize institutional investors; further down on the pyramid are smaller and retail-level managers.
Second, numbers are prolific. There may be only a handful of institutions with more than 12 figures ($100 billion) under management, but there are several dozen pensions with tens of billions of dollars under management, and there are countless smaller managers who aspire to move up in the rankings.
So while the buy-side universe is vast, we heard some common themes, and certain names came up in conversation again and again.
In the pension space, “one public plan that’s pretty innovative is the Tennessee Consolidated Retirement System,” an industry consultant told us. “The state has made a decision to freeze the pension plan for future employees, and in doing that they’re creating a pretty attractive defined contribution plan. They’re co-mingling the operations of the DB and DC to leverage the best investment talent, and they’re providing participants with well-vetted, high-performing money managers.”
“The Washington State Investment Board is very thoughtful, very well organized, and run very well,” a source said. “They manage certain components in-house.”
“Los Angeles County Employees Retirement Association is very well-run,” an industry observer said. “They have strong governance around the alternatives they deploy and the third-party active managers they use.”
One consultant spoke highly about two CIOs of institutional asset owners: Greg Williamson of BP Corp. in Chicago, and Sam Gallo of the University System of Maryland Foundation. Williamson “has a tremendous, decades-plus track record of running the portfolio,” this source said. “He knows what he is doing and he is extremely well-regarded.” Gallo joined USM in 2012, and he has done excellent work in mitigating the risks of the legacy portfolio. “In the institutional space, it can take a few years to get your arms around the investments you have on your books,” the person said. “Sam has done that well.”
Among pension consultants, Cliffwater is a standout, at least according to one pension CIO we spoke with. “(Cliffwater CEO) Steve Nesbitt is an industry leader in terms of hedge funds, and the firm runs a deep program in terms of diligence in managers, rating them and putting together various allocations for clients,” the CIO said. “They are really strong at allocating access into funds where it’s extraordinarily hard to get access.”
A less-well-known name in the business of servicing institutional asset owners is Washington-based fund of funds 57 Stars. For one pension CIO who was looking into expanding emerging-market private equity, “I found 57 Stars to be incredibly patient, very educational, academic and focused, and there was a lot of rigor to their data,” the CIO said. “ They were very impressive — I found them to be more consultative on this process than our investment consultant.”
In the institutional-investment space, we heard lots about BlackRock — no surprise considering it’s the world’s largest asset manager.
“BlackRock is extraordinarily well-informed on the market structure side — as well or better than most banks,” one exchange executive said. “They really know what they’re talking about.”
“I find BlackRock to be less ‘salesy’ than other managers,” said the chief investment officer of a mid-sized state pension plan. “They are willing to invest the time to develop a long-term relationship and implement a plan, whereas other firms are there to sell product.”
“BlackRock is focused, and I give Larry Fink a lot of credit for their mindset of building your trust, discovering your needs, and packaging a solution that works for you,” the CIO continued. “I can call and ask them a question without fearing having a product guy in my office the next week, trying to sell me something. They’re also very aggressive on fees, which is a headwind for returns.”
Another public-pension CIO cited BlackRock for “the breadth of their products but also the quality of their research and how they integrate that research into working with their clients. They’re really a very important partner for us in that respect.”
The Markets Choice Awards recognize institutional buy-side excellence through the prism of excellence and expertise in trading, market structure and technology. To that end, we heard about a number of big institutions that are distinguishing themselves.
“To me the most impressive trading desk is Goldman Sachs Asset Management, headed by Rich Vanecek,” said a trading-technology executive. “It’s not just their technology, but it’s also the structure and the people he’s brought on. The way they’re approaching trading across multiple asset classes for the next 10 years is very impressive, to say the least.”
One senior sell-side electronic trading executive split his vote. “There are two buy-side firms that are head-and-shoulders above the rest in terms of understanding execution and trade implementation — Citadel Asset Management and Fidelity Investments,” this person said. “They’re very different organizations, but they both do a fantastic job.”
Fidelity “is doing a lot of interesting, ground-breaking proprietary things,” this same person continued, while another source noted the Boston-based asset manager is “taking on new initiatives with regard to buy-side optimization of technology.”
J.P. Morgan Asset Management drew kudos. “They were the first ones, with Ben Sylvester back in the day, to really utilize data and realtime analytics to derive trade scheduling and trade destinations,” one source said. “Curt Engler is in New York, and the guy in Hong Kong who really deserves a lot of credit is Lee Bray.”
“Some of the new stuff that T. Rowe Price has put together is pretty impressive,” one technology executive said. “They’ve been able to automate their cash trades and save basis points. They are vocal proponents of market structure, fairness, transparency and improvement.”
One smaller investment firm we heard about is Toronto-based Burgundy Asset Management. “They’re equity-only and they tend to be a bit contrarian,” said a pension CIO. “ They are very disciplined investors and they have been very successful over the long term. We really like them.”
Among large hedge funds, one public-pension CIO likened AQR to BlackRock. “I have found a similar attitude — because of their fee base, both AQR and BlackRock can afford to be patient and have a long-term focus.”
“We’ve asked AQR questions pertaining to a couple of our RFPs,” the CIO recounted. “They helped our staff evaluate a number of different ways to proceed. When AQR visits, they don’t bring a pitch book of solutions, rather it’s more academic.
AQR is very patient, and I find myself not cringing when I call them.” AQR’s proficiency in trading, technology and market structure “is simply amazing,” said a senior executive at a major software provider. “They’re really on the cutting edge.”
An executive at a prominent futures firm likes the savvy of Millennium Management. “Millennium operates a model where they go out and attract different teams and groups,” this person observed. “They work separately, but they aggregate their power to get what they need out of the sell side. The groups compete internally on purpose, but it’s always to the advantage of the firm rather than to the detriment of the firm.”
Quantitative-trading hedge fund Stevens Capital “is very good at what they do,” one source said. “They are highly active from a trading perspective.”
Smaller hedge funds lauded by our market sources include AHL Diversified, Aspect Capital, BlueCrest Capital, Cyrus Capital, Mudrick Capital, Sonic Capital, and Winton Capital.
Bank broker-dealers experienced a fairly quiet 2014. That quiet wasn’t good in the sense that trading volume and market activity continued to trend on the tepid side, but it was good in the sense that for the most part, the firms kept their heads down and persisted through another year of regulatory headwinds. “We have a lot going on on the regulatory side,” said one sell-side trading executive.
Among the biggest ‘Bulge Bracket’ banks, “you always put Goldman Sachs in the top category,” said a senior exchange executive.
Wall Street banks are in business to make money first and foremost, but with risk, governance and compliance continuing as buzzwords, Goldman has distinguished itself in working behind the scenes.
“A big theme was a push towards industry risk controls, and Goldman was a leader,” said an executive at a large proprietary trading firm. “There have been a lot of headlines about trading systems gone awry, which has significantly impacted the industry, and highlighted the need for a renewed focus on risk controls. Our firm takes this very seriously, and we came up with our own methodology to improve. Goldman simultaneously has seemed to do the same thing, and obviously they have a lot more resources than we do to push for it.”
Goldman is “addressing all sorts of risk topics, from top to bottom,” the prop-trading executive continued. “That starts with the OCC, but it also extends to exchanges, to the firms that they clear for, to competing firms, and probably within their own firm as well. They’re really advocating for sounder risk practices.”
Another source likes Goldman for its “great prime brokerage / prime services area.”
Some of J.P. Morgan Chase’s recent initiatives have caught the eye of market participants. Last summer, the bank launched J.P. Morgan Execution Services, a new electronic trading group headed by Frank Troise. Peter Ward runs futures and options within the team.
“They are going around the company and getting the best of the best to join the global execution initiative,” said a futures executive. “The group is pretty interesting. Beyond that, they have created an investor services group, which took prime services, custody, stock lending, and a bunch of futures and options into a single unit rather than a bunch of separate units. It’s the ultimate broker-dealer offering, and compensation is the key because if it’s successful they’ll get compensated well, but if they’re not successful in this integration, then they don’t necessarily get paid all that well. But their investor services group is a big innovation — they’re the only ones who have been able to pull it off end-to-end.”
A Chicago-based exchange executive said “another bank that is a terrific competitor in the space and has really been on the rise is Morgan Stanley. They’re strong in traditional sell-side banking and equity derivatives, and also on the marketing side.” A technology CEO said Morgan Stanley is “very innovative in their use of IT, and some of their groups are really awesome.”
Morgan Stanley traders and technologists are “very bright people who understand the minutiae of market structure very well,” said a New York-based exchange executive. “They have a very good perspective on how it impacts their business, and they have a genuine mentality of caring about their clients and making that a priority. They also try to do the right thing for the marketplace.”
Another source said Deutsche Bank is “really good at figuring out how to manage IT. The bank pushes the envelope in thinking about its infrastructure, and it has the discipline to keep things focused.”
For algorithms, “Credit Suisse is a perennial stalwart,” said a trading-technology executive. “They are constantly in front of the curve.” Another person opined that Dan Mathisson, head of Credit Suisse’s Advanced Execution Services, deserves recognition.
Bank of America Merrill Lynch won acclaim for its electronic equities trading platform and for its futures business.
Barclays was mentioned. “Despite some of the issues they’ve had recently, they’ve made some very good hires,” said an exchange executive. “I think they are going to improve quite a bit. They have the right people in place to help navigate the stuff they’re dealing with.”
One risk executive opined that even amid a market dominated by electronic trading, the biggest Wall Street banks will prosper the old-fashioned way. “Places like BoAML, Credit Suisse, Goldman, and J.P. Morgan have great relationships. They are well-positioned for the future.”
Some banks below the Bulge Bracket garnered praise.
“Wells Fargo established an institutional desk here in New York about a year and a half ago in New York,” said an exchange executive. “They have a group of big names and they’re trying to generate new business. They have come a long way.” This same executive also complimented Jefferies and Nomura.
A technology executive cited BTIG. “What they’re doing with their ETF desk, showing volume growth in this environment, is impressive,” the exec said. “Mark Perdigao is the guy who runs the desk. It’s a buck-the-trend story.”
Electronic Market Makers
Trading volumes haven’t been robust, but some consolidation in the sector and the outlook for increased electronic trading of non-equity asset classes may portend a brighter future for electronic market makers, also known as electronic liquidity providers.
Hudson River Trading is “very much at the top of the queue in terms of being competent and adept,” one exchange executive said. “I can’t think of anybody more astute in terms of market structure. They are extraordinarily tight from an operational standpoint, and they are extraordinarily selective in staffing. They deploy resources in a very efficient way and they’re able to react to market conditions faster than most firms. They’re extremely good at what they do, and they produce an exponential amount of business relative to their size.”
Citadel Securities “has a great team,” said a New York-based market executive. “They have a lot of good talent that they use to their benefit. They do a very good job.”
“Tower Research does a fantastic job,” one source said. “They have a host of separate trading groups that trade globally across asset classes. I think they’re very, very good at what they do.”
One person said “Two Sigma has done quite well. They are doing a great job at building a business in a very competitive space. They’re all very bright people.”
“Jane Street is fantastic — they have some of the brightest people on The Street,” one source said. “They operate a really tight business. They are very cognizant of risk and how to manage that risk. They have carved out a unique space and they are probably the best at what they do in that space.”
Jane Street “just hired some really high-caliber people,” this source continued. “They deploy capital efficiently, and as such the firm is a big hitter for its size. They’re extremely good at risk management, which is a critical part of being a market-maker.”
Other ELPs we heard about were Latour Trading and KCG. “Latour is excellent,” a source said. “They run a very good shop. They punch above their weight, as they have a relatively low headcount, but they produce some pretty good-sized volumes.” KCG “is very competent and intelligent.”
In the floor-broker space — still surviving in a world of screen-based trading — we heard Meridian Equity Partners is a quality organization. “(Senior Managing Partner) Jon Corpina is a fantastic guy,” one source said. “The floor-broker business obviously has become less prevalent, but it can be critical to have people on the floor of an exchange who can competently facilitate institutional business. Meridian does a good job at that.”
“CME does a pretty good job in a tough business,” one market-making executive said. “They have the difficulty of trying to please everyone because they’re in a semi-monopoly futures space. They articulate the needs of the marketplace, not only to all of their users, but to regulators as well. They also do a lot with education.”
One technology executive opined that IntercontinentalExchange ”is the smartest exchange on the planet.”
A sell-side source liked Bats. “As far as platforms that just continue day-in and day-out to work and create value for investors, Bats does a very solid job,” this person said. “They are very solid operators and the run a very stable, predictable platform. I think we’ll see a very smooth Direct Edge integration, which will be a 2015 story.”