The bonny buy side

It may be 400 miles from London with a population a fraction of the size of the UK's capital at just 450,000, but the city of Edinburgh boasts an innate friendliness that is said to attract numerous professionals fleeing the grind of the larger cities. For the head traders at Edinburgh's many buy-side institutions, that sense of community permeates even their professional lives and their relationships with peers. Senior traders at competing firms know one another well and have worked together in the face of recent market changes.

"The senior dealers actually talk to each other here in a way that they rarely do in London," says Tony Whalley, investment director and head of dealing at Scottish Widows Investment Partnership (SWIP). "I obviously wouldn't give my trade details away to competitors, but being able to have a meeting, or go out for dinner with peers and prepare collaboratively for challenges like Mifid is a great advantage."

Edinburgh is reckoned to be the sixth largest fund management centre in Europe. Just as in London, its asset managers have been quick to embrace new technology over the past five years and have certainly not lagged behind their counterparts in other buy-side centres in taking on order management systems, algorithmic trading tools, and crossing networks. Third-party providers such as Charles River Development, Fidessa LatentZero and Linedata Services can all boast a small but loyal buy-side client base in the city. Liquidnet, ITG Posit, and other dark pools are also well-used. But above all else, it is the drive for best execution and the desire to ride the waves of market volatility and new regulation that unites Edinburgh's buy-side community.

Right in the centre of Edinburgh and just a stone's throw from the main shopping district, the Standard Life Investments building has the look and feel of an old country house, complete with grand staircase and oak-panelled walls. The firm was founded in 1998 as a buy-side spin-off from Standard Life Assurance Company, the long-standing financial services firm whose head office is located just a few streets away.

Still in its first decade of operations, Standard Life Investments has grown its assets under management to roughly £160 billion. A third of those assets are invested in the equity markets, for which Jim Conway, global head of equity and equity derivatives trading, is responsible. Having been with Standard Life for 21 years, Conway took up the reigns as head of the firm's three trading desks early last year. With two traders in Boston, three in Hong Kong and seven in Edinburgh, his role has become a truly global one. But his background in derivatives and portfolio trading has made him well-tuned to the recent challenges of the buy-side trading desk.

As the firm's assets have grown over the past ten years, Standard Life naturally outgrew its home-built order management system and had to go through the standard due diligence process - or 'beauty parade' - to choose a third-party system. The firm ultimately settled on Charles River Development's investment management system (IMS) five years ago, which has also enabled the use of Fix and a number of other innovations.

In his years with the firm, Conway has seen the evolution of a business case for more advanced trading tools. "Whereas before we always used to go to the Stock Exchange to get a price, there are now a number of different ways to execute an order, and so it becomes more difficult to manage," he explains. With the advent of crossing networks and algorithmic trading, technology has become an imperative to check prices, pool information, and ensure the best deal for clients. "The Charles River platform has enabled us to be in charge of running things much more," he says. "In turn that makes the job much more exciting and challenging than it has been in the past."

In addition to the IMS, Conway's traders also use Bloomberg's execution management system (EMS) which comes free with the vendor's Bloomberg Professional desktop application, but he reveals that the firm is reviewing whether this is actually the best option. He will have a careful eye on Charles River this year as the vendor prepares to release the latest version of its software which will include an integrated EMS: "It would be great to have an integrated system, but I can't afford to take anything at face value so we'll wait until it actually comes out before we commit."

Meanwhile it is business as usual for Conway as his team directs increasing order flow through alternative trading routes. He estimates that about 6% of the firm's order flow already goes through Liquidnet, the buy side-only crossing network which now operates globally. "Liquidnet is definitely the biggest crossing network for us," he says. "The ability to negotiate trades with other buy-side firms is a big step forward." He also executes a growing number of orders via broker-owned algorithms, primarily those of Credit Suisse. The proportion of orders traded algorithmically has jumped from 1% to 6% in the past year alone. Since the global credit crunch began he has found that brokers have been less willing to use risk pricing over agency broking and so the need for algorithmic trading has increased. "When risk pricing declined, it became apparent that we had to have a full armoury of tools available to trade the markets," he explains. "We're still gaining experience with algorithms and they're certainly not a solution for everything, but we do need to be using them."

With £15.7 billion under management, Martin Currie is smaller than many of its competitors, but it is no less serious about its trading team and the technology that is needed to support it. With a particularly strong exposure to the Chinese market, where it has two experienced fund managers and a team of analysts, the firm's seven traders are based entirely at its head office, which sits in the shadow of Edinburgh Castle.

Head of dealing Sheena Kelman has been at the helm of the trading desk for nearly five years, having previously spent 17 years at Gartmore in London. Building a strong platform has been a major part of her responsibilities since she arrived at Martin Currie. "As with any dealing team, we needed to get new ideas and bring the platform and the team forward, which I think we've done very successfully," she says.

One of her first steps was to put in a front-office system, choosing Fidessa LatentZero's full Capstone suite for the benefit of the fund managers, traders, and compliance team. The project began soon after Kelman arrived in 2004, completing in early 2006. "LatentZero was the best fit and continues to work extremely well but we're not a firm to stand still and we continually strive to better what we've got," she explains. By her own admission, her team came late in the day to Fix, but a LatentZero upgrade last summer gave them full Fix functionality and she is now connected to around 12 brokers through the Fidessa network.

Preparation for Mifid has naturally taken up a great deal of Kelman's time and the challenge was compounded, she says, by the widespread confusion surrounding the directive. "Mifid in itself brought some IT requirements, but there was a lot of ambiguity prior to the deadline about what was required," she says. The twin problems of trade and transaction reporting that have exasperated the European buy side in the wake of Mifid have been particularly prevalent for Martin Currie. As it trades so much in the Asian markets, the firm has faced ambiguities about the regulatory reporting of trades in Asian securities that also happen to be listed in Europe. "One or two of our brokers have said that they wouldn't or couldn't report dual-listed trades to the FSA," explains Kelman. "Since November 1, we have outsourced to brokers where we could, but taken on the reporting for those trades that can't. That also needs technology; we've built a short-term solution but are looking at something more robust in the long-term."

When it comes to issues like Mifid and transaction reporting, Kelman says that peer- group discussion has been highly beneficial as a new way to solve problems: "Fifteen years ago buy-side firms tended not to communicate with each other very often, but technology has changed all that and we talk to other firms a lot more, particularly those that are on the same OMS and face similar issues."

Another concern for Kelman is the gradual fragmentation of liquidity in the equities markets and the arrival of new trading venues in the wake of Mifid. Her challenge, she says, is to disseminate which venues are worthwhile and which should be left well alone. "Our job is to find out which dark pools are of use to us and then make sure we are linked up, whether by smart order routing via brokers or directly," she explains. "We must have access to dark pools, but it's still in its infancy and we have to be careful not to trade in the wrong pool." Her first port of call, much like her buy-side peers in Edinburgh and beyond, is Liquidnet, where business gets done cheaply and without market impact.

As this year continues to unfold, Kelman is focused on the robustness and breadth of the trading platform. "I want to get all of my brokers onto Fix, broaden our use of algorithms, and at the back of my mind is the question of whether we may also need to go down the EMS route next," she says.

After the merger in 2000 of Scottish Widows Investment Management (SWIM) and Hill Samuel Asset Management, SWIP came into being and now manages total assets of roughly £100 billion. Investment director and head of dealing Tony Whalley is a well-known figure in the industry, having appeared on panels at numerous conferences as a staunch proponent of buy-side interests.

Whalley began working at SWIM in 1989, after a 12-year stint on the sell side in London. He now heads a team of eight traders who cover the US, European, and Far East markets. The advent of new technology began soon after the formation of SWIP, when the firm rolled out ITG's MacGregor XIP order management system in 2001. The platform has now been in place for seven years, with around 50 live broker connections as well as algorithmic trading and direct market access (DMA) capabilities.

Much like Jim Conway at Standard Life, Whalley has seen a growing use of broker-owned algorithms over the past year - jumping from about 5% to 20% of total business - because of the new-found reluctance of the sell side to commit capital and put up risk pricing. Algorithmic trading is certainly crucial, but Whalley has chosen three trusted providers and is cautious about getting too hung up on chasing the best algorithm or the lowest latency as the playing field continually changes. "Algorithmic trading is a very profitable business for the banks and very competitive," he explains. "But we've decided to stay with three providers and ask them if we need a new algorithm, instead of chasing other providers."

Monitoring and enhancing the provision of technology to the trading desk naturally takes up a great deal of Whalley's time and he is envious of those larger firms whose IT budgets are significantly greater. "IT spend is a big issue for us and for our peers," he says. "We spend a lot of time and effort to ensure that we prioritise our needs correctly and that those priorities are taken on by senior management."

He reflects that while larger firms may have endless IT budgets, there are plenty of smaller firms that still cannot afford an OMS or basic Fix connections. "We have been very lucky to get all our high-priority systems in place, but IT spend is still a major issue."

Regulation has of course been a big area of focus for SWIP, with major projects undertaken to comply with the FSA's CP176 and Mifid. Whalley says that while Mifid has not yet achieved the transparency that was intended, CP176, which forced firms to unbundle the research and execution costs they charged to their clients, has had positive repercussions for the business. "Each analyst or fund manager now effectively has a research budget which they can spend by either talking to research houses or brokers," he explains. "We have definitely moved beyond the problematic situation where we had to execute with a broker if we were getting research from them."

But with regard to Mifid, Whalley is adamant that the regulation has still not achieved any real success. "From a best execution perspective, nothing has changed for us," he says. "We're still striving for the best price for our investors and still trying to make sure that trades settle on time - the fact that we have the Mifid-compliance check doesn't actually change anything." And the widespread reporting problems have even decreased overall transparency, he says.

Despite his Mifid grievances, Whalley sees something of a hiatus this year as much of the past three years has been taken up with preparing for regulations. "For the first time in years, we don't have a regulatory framework that we have to confront this year," he says. "It's actually quite refreshing and means we can get on with trading and ensuring that we're totally capable of working out what's going on in the market."

On Thursday 20 March, Tony Whalley was appointed non-executive director of Chi-X Europe, the pan-European multi-lateral trading facility (MTF).

With £47 billion under management, Aegon Asset Management is home to a centralised dealing desk of seven traders who work across asset classes, including equities, bonds, foreign exchange and derivatives. Born and bred in Edinburgh, head of dealing Adrian Fitzpatrick has worked for the city's investment management industry for 34 years. Starting his career as an "office boy" at local fund manager Ivory & Sime in the 1970s, Fitzpatrick worked his way up to head of trading and left after 23 years to head up trading at Aegon.

In his 11 years with Aegon, Fitzpatrick has spearheaded the creation of the centralised dealing desk and the installation of core trading technology. "When I arrived in 1997, the fund managers did all their own trading so my job was to set the whole thing up from scratch," he recalls. The priority was to create an equity dealing desk, which then took on the bond markets a year later. Today the firm trades roughly 50% in the equity markets and 50% in the bond markets.

Next on the agenda was order management technology. Fitzpatrick chose thinkFolio, a London-based software vendor with a strong heritage in the bond market, to deploy an OMS to the new desk. The system went live five years ago and he has worked with thinkFolio to call in all asset classes as the business grew. "We wanted flexibility and the ability to develop in the future, and thinkFolio has done a great job in integrating the things that we want the OMS to do," he says.

A new chapter in Aegon's technology journey is about to start, according to Fitzpatrick; the asset manager is on the verge of going live with Fidessa LatentZero's EMS. He says that the fragmenting market in Europe is driving a need for better tools to seek out liquidity among multiple trading venues. "An OMS only gives you so much flexibility," he explains. "The EMS will allow us to do a whole raft of different things and control not just our commissions, but also the way the order gets sliced and diced as the market fragments."

As for advanced trading tools, Aegon uses six broker-owned algorithms, which is likely to increase once the EMS is up and running. "There has been a phenomenal investment in advanced trading tools, but we have chosen to do more algorithmic trading than direct market access (DMA)," says Fitzpatrick. "We hardly do DMA at all, because you assume all the risk on your own books and it's all too easy to create market impact if you trade incorrectly."

Market volatility, Mifid, and the unbundling regulation have all affected Fitzpatrick as they have his peers, but he feels the most significant change is the appearance of new trading venues. "Trading practices are very much the same since Mifid came in, but the new entrants, such as Chi-X and Turquoise, are changing things," he explains. "Competition is good, but as the market fragments, the trade reporting problems we have seen will only be exacerbated."

Whatever happens in the market, Fitzpatrick stresses that his job will always be to seek out liquidity, and his focus therefore will remain on having the best tools available to do that. For the moment that means rolling out an EMS and making sure his brokers have smart order routing in place. "My focus for this year is putting in the EMS and hoping that the markets get through this turbulence and volatility," he says. >