Vernita Exum, head of index equities in Europe at Vanguard Asset Management explains how the firm is navigating the current environment as well as the regulatory and technological landscapes.
What measures is Vanguard taking in response to the coronavirus and the current market environment?
To ensure Vanguard can continue operations during a significant regional or global event (such as a pandemic), we routinely perform many of our mission-critical business functions in more than one location. This practice provides geographic diversity for our operations and helps ensure our most critical resources and employees are available to clients during an emergency.
Complementing our multiple campus locations in the US, we also leverage Vanguard locations outside the US to provide additional layers of operational options, and to facilitate a 32-hour trading day. Our global locations are leveraged to transfer trading between regions as necessary.
Furthermore, our Business Continuity Teams have worked across the company to ensure that teams can work remotely when needed. Our investment teams regularly practice contingency scenarios including alternate work locations. And the global nature of our investment teams ensure that our investment professionals regularly work together across regions to manage our portfolios.
MiFID is two years old and how has it impacted the equity world?
One of the main goals of MiFID II was to increase trading on lit venues, but this has not yet been achieved. In fact, figures show that continuous trading on traditional exchanges accounted for around 36% of all equities trades in Europe last year, down from about 42% in 2018. We have seen a shift in liquidity to systematic internalisers (SI) as well as closing and periodic auctions. We have also seen changes in research coverage under MiFID II in that there seems to be less research being conducted on small to mid-cap stocks. This potentially impacts all investors by creating mispricings in the market which in turn results in the possibility of higher trading costs.
What issues do you see the MiFID refit addressing?
As an industry we have learnt to live with a certain amount of imperfection and tend to be experts at workarounds. We are also expected to deal with constant change, but too much change, too fast, and too often can be majorly disruptive – it is expensive, increases complexity and risk, and distracts from our purpose of focusing on achieving good results for our investors. From a broader standpoint, I think we all hope the refit will result in a reasonable amount of stability. Cost benefit needs to be carefully weighed and time needs to be given for safe and proper implementation for each consequential change.
We would like to see a focus on MiFID II’s Share Trading Obligation. The STO puts restrictions around venue access (it requires trades to be executed only on regulated markets, MTFs or systematic internalisers) which can potentially lower available liquidity and increase market fragmentation. We also are supportive of the prospect of a true EU consolidated tape since this could improve trade execution if it provides a comprehensive, trusted benchmark to monitor transaction cost analysis. Finally, we think there is more work to be done around the reference price waivers associated with crossing stock, and usage of continuous auctions.
What other regulation do you think is having a dramatic impact?
I would say that the CSDR (Central Securities Depositories Regulation) could have a bigger than anticipated impact (see p.78). The regulation, whose implementation has been delayed until 1 February 2021, aims to strengthen settlement discipline by imposing daily financial penalties for failed settlements and mandatory buy-in provisions. Although we support the regulation’s objective of improving the settlement processes of stocks in Europe, we have some concerns that the aggressive buy-in regime could be challenging to manage and result in additional costs that will be borne by end investors.
There is also the potentially unintended consequence of the regulation making it more difficult to short stocks so that cross-border trading strategies and hedge derivative trades will be more challenging to implement. As a result, although not immediately obvious, the CSDR could have a negative impact on the ETF primary market. There remain a number of open questions associated with the implementation of this initiative and I hope that regulators and the industry can use the extended implementation period to address and resolve them.
In terms of industry trends, do you see the migration towards passive investing continuing?
Passive investing has been a long-term trend and I expect it will continue because index-tracking strategies are a cost effective, transparent and easy to understand way to build a portfolio that aligns with an investor’s goals. If you think about a customised portfolio, index-tracking products can be seen as building blocks that offer inexpensive, broad and diversified exposure to markets.
Looking at the future of equity trading – how has sourcing liquidity and volumes changed? How is the industry addressing these changes?
All things being equal, I would generally prefer to source liquidity in one large block than to chip away at an order in an algo for several weeks, so I would say one key change has been the increasing fragmentation of our markets and liquidity pools. The industry has found it more complex and challenging to source liquidity across different venues in an efficient and cost effective manner. Some of this change has been driven by innovation, automation, regulation, as well as competitive forces and these are likely to be the same inputs that will resolve our current challenges. As the investment community targets this opportunity both the buyside and sellside continue to evolve innovative tools and enhance existing tools that can be used to maximise liquidity opportunities. Promising algorithmic trading enhancements, automated trading flow aggregators, and preliminary testing of AI related applications are exciting, but there remains much work to do for the industry and policymakers.
The quality of data is and will continue to be a hot topic. Is progress being made and what needs to be done to continue to improve the quality?
Though there is a long way to go, there has been progress in improving data quality, mostly because there is a big push from trading desks to leverage data for better decision making. We are not only better at tagging, collecting, and storing our internal data, but we also understand that ‘fit for purpose’ does not necessarily mean 100% perfect. There is a much better understanding by everyone involved – portfolio managers and traders – surrounding what questions can be answered by data and the focus is on how we can best use data sources to produce better outcomes for our clients. Of key importance is an industry-consistent approach in how we collect, store and utilise data that is shared between firms, exchanges, and regulators, etc. Industry-wide initiatives continue to try to tackle this (most recently the consolidated tape initiative). It is important that we continue to push forward on solutions for industry wide standardisation.
How is data science being leveraged by your department?
There is no doubt that the industry has adopted a more information performance driven approach and this is also true for our desk. In general, in the past we were more interested in historical data to look at patterns and trends, however as technology has continued to evolve we have shifted to focusing on more dynamic tools. Previously, buyside firms would rely on sellside firms or vendors for transaction cost analysis and other data analysis, but we have now integrated data analytics into our desk workflow, providing portfolio managers and traders with the real-time tools necessary to make data-driven decisions.
It is also a much more collaborative effort, as we have a data analyst on the desk who works alongside our team to analyse strategies, manage the algo wheels and evaluate the trade performance of everyone on the desk, as well as our broker trading partners.
What are some of the challenges with the new technology?
Technology can be a beautiful enabler or an endless distractor. It is very important that we control the tools rather than the tools controlling us. This means understanding our strategic objective and the problem we look to solve, then choosing the right tools that will be the most effective fit for our desk.
It is also key to have a consistent approach to problem-solving to ensure all of my team feel empowered to contribute so that the best ideas are surfaced and heard. If there are benefits to internal development of a new tool, we will carefully consider that route versus an ‘off-the-shelf’ solution.
We believe it is important to continue to invest in R&D, not only to produce innovative ideas and solutions but also in terms of creating a more agile way of working which can produce results much more quickly.
How has your department and industry responded in general to the different regulatory and market trends?
Strategically Vanguard strives to be a leading influencer in the industry and we spend our time working with regulators, index providers, and industry groups to provide ideas, input and guidance. We may work with an index provider, for example, before they implement a particular country in an index to look at the regulation, execution and settlement practice to ensure the market is investable.
If we have concerns, we will help with actionable recommendations for improvements and provide regular feedback. Overall, it is about taking an interest, sharing best practices, and producing successful outcomes for all investors.
I see you were scheduled to be on a panel at TradeTech – do you think progress is being made on the D&I front? How can the buyside build the teams of the future?
I have been in the financial services industry for my whole career in differing roles, and right now the momentum is strong and there is greater awareness that increasing diversity and inclusion is not only the right thing to do but it also has a material impact on the bottom line.
We have to think out of the box such as hiring people from a non-traditional background because they have strong growth mind-sets that will provide us with new opportunities and ideas – we value the ability of these individuals to both learn the business and teach us new things. Also, we have to change how we think about work and how we define productivity (no more office face-time) and create the best overall environment for both business and personal success.
Progress is being made but we have to also recognise that it will still be hard to make big changes, change the status quo and create the optimum workplace of the future. We are very interdependent in the investments and trading community, so firms are rightfully hesitant to take bold steps alone for fear of disruption.
We have recently seen market leaders take brave bold steps such as the London Stock Exchange’s recently published consultation on shortening its trading hours. Steps like this will create better work life integration for all markets related professionals.
Biography: Vernita Exum, is the head of index equities in Europe at Vanguard Asset Management. Exum was previously a portfolio manager in the Vanguard Equity Index Group involved in the daily trading and portfolio management of Vanguard’s international index funds. Before joining Vanguard, she was an equity market specialist for Bloomberg LP and a director on Bank of America Merrill Lynch’s global portfolio trading desk. Exum received an MBA in finance from The Wharton School of the University of Pennsylvania and a BS in accounting from Norfolk State University. She is a CFA charterholder and is a licensed CPA in the Commonwealth of Virginia.
©BestExecution 2020
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As has been previously noted in 2019 we had seen an increase in trade sizes across the non-lit regulated markets, but we see some dramatic changes in volumes traded in SI.
