HoT Profile: Gianluca Minieri, Global Head of Trading at Pioneer Investments.
Our interview took place the morning after Pioneer Investments had been awarded the accolade of ‘Best Multi-Asset Trading Desk of the Year’ at the 2016 Global Alpha Trader Forum.
GM: The 2016 Global Alpha Trader Forum is a multi-asset trading event, where the buy-side community gathers once a year to discuss the most important issues faced by the trading environment. We are particularly proud to have been voted as ‘The Best Multi-Asset Trading Desk of the Year, particularly because only the buy-side community is allowed to vote for this award. So this is a truly unbiased recognition from the competition, and from the industry generally, that our trading desk has been supporting the trading environment in a constructive way, not just in terms of execution but also that we’ve been working towards making the trading environment, and financial markets in general a better place, not only for traders but also for investors, and eventually for clients.
HoT: Please tell us about your background and the career path that has brought you to your present position.
GM: I started my career as a risk manager at Banca del Salento, a small private bank in the south of Italy that was very active in proprietary trading. Due to my role, I had to visit the trading room many times a day, in order to liaise with the traders and I immediately became intrigued and fascinated with the lively, vibrant atmosphere, the buzz of the trading room and I realised that that was the place I wanted to be. A year later, I became a futures and options trader in that bank. Since then, I’ve traded every possible asset class. I’ve traded equities, fixed income, credit derivatives, commodities, hedge funds, FX. So pretty much everything. In 1999 I was asked to move to Ireland to set-up a proprietary trading operation for the bank. I set up that business from inception to completion. That was my first managerial role. Soon after that, I was appointed Chief Investment Officer and then a couple of years later, Chief Executive Officer. That’s where I stayed until 2007 when I moved to Pioneer. I currently oversee Pioneer’s trading operations globally, in Asia, Europe and the US.
A lot of market players, HFT in particular, could anticipate our trading intentions, follow our footprints and profit from them. We have nothing against HFTs, we just do not want to interact with them since we have no interest in what they do.
HoT: What are your current trading strategies?
GM: We are a large asset manager with an excess of $250 billion under management. We trade for a variety of different funds with different investment strategies, investment objectives and risk profile. In 2015, we traded in excess of one trillion euros. With that size in mind, it is easy to understand that when we define our execution strategy, liquidity is certainly the key element that we consider. We have to elect liquidity as our key parameter. Our main objective is to execute our orders in line with the trading instruction that we receive while minimising market impact. Because we trade in largesizes, we feel that the main priority is to trade with the level of confidentiality that our large orders deserve, because we feel that if that confidentiality is not perfected, people in the market can actually sniff out, very easily, what our trading intention is. A lot of market players, HFT in particular, could anticipate our trading intentions, follow our footprints and profit from them. We have nothing against HFTs, we just do not want to interact with them since we have no interest in what they do. We are real money investors, we invest money on behalf of a large variety of clients, both retail and institutional, and we just want to execute our orders with the confidentiality that those orders require. Therefore, the trading strategy, the route and the venue really depends on the type of order that we receive. If we are executing large orders, we usually rely on our most long-term, trusted broker relationship, if we are executing small orders, we usually go through electronic platforms, algo or direct market access through the exchanges.
2008 had its specific characteristics, I think all of the crashes share common mistakes and 2008 makes no exception. 2008 was a crisis where all the major market experts, including the central banks, all shared the idea that ‘this time is different’.
HoT: What are your memories of the 2008 crash? What lessons have been learned from that?
GM: Having been in the market for almost twenty years now, I have seen a number of crashes; The Russian crisis of ’98, the dot-com bubble of 2000, the Argentinean crisis of 2002, and then, of course, the credit crisis of 2008. At which time I was actually heading a large proprietary trading operation that invested in credit, so I was really at the centre of that hurricane. At the time we were holding a lot of correlation risk, default risk and credit risk. What I remember of that period is that the majority of the market, the majority of other traders, were all on the same side of the market; I remember that the market was just a huge consensus trade. We were all long-credit, we were all long-correlation, we were all long-default. I’m proud to say that we survived the 2008 crisis, even with that type of portfolio, because we realised, before many others, the fact that the market was always on the same side. Once the market started to fall, the market itself, and most of the market players, had to deleverage their risk position extremely quickly which was what created the crisis.
What is the lesson? Although 2008 had its specific characteristics, I think all of the crashes share common mistakes and 2008 makes no exception. 2008 was a crisis where all the major market experts, including the central banks, all shared the idea that ‘this time is different,’ and the ‘this time is different’ syndrome is a very dangerous one, because it can affect people that, otherwise, are very savvy and even the brightest financial minds can actually be convinced that it’s true.
‘This time is different’ syndrome is a very dangerous one, because it can affect people that, otherwise, are very savvy and even the brightest financial minds can actually be convinced that it’s true.
Pioneer is a long-term investor and the only way you can succeed in the long-term, the only way you can consistently provide good investment performances for your clients, is if you invest within a very strict risk-management framework, within a strict set of rules. We understand, as investors, that you cannot hedge all risks, you cannot hedge the world, but you can choose which risks to take, be aware and transparent on which risks you’re taking and look for a fair remuneration of those risks. If you have an early risk detection system in place and a tight risk management trading environment, you can actually survive, because you set up mechanisms that impede you seeking remuneration on risk that you didn’t want to take.
HoT: How are you being affected by new regulations, particularly MiFID II and MiFIR?
GM: Representing Pioneer, I had a very active role in the latest approval process for MiFID II. I’ve been part of a buy-side working group that has worked with the European Commission throughout the approval process. Given the 2008 crisis, we envisage a greater role for supervisors, for central banks and regulators. We want to create a financial market environment in which best practices are encouraged through greater transparency and fair competition in order to create a level playing field for all the players. The problem with the regulation, and I have been, in many cases, critical of the latest approval process, is that in too many cases, regulations happens only as a response to extreme events or fraud cases. The consequence is that the discussion around the table of policymakers becomes immediately too politicised, and philosophical around topics like ‘more transparency is always good’ and, ‘less transparency is always bad,’ and that’s a mistake because it can lead to unintended consequences of the regulation. We have taken a very proactive approach, doing the approval process of MiFID II, but we don’t think that the policymakers have actually taken on board enough feedback from the industry, and we fear that MiFID II might lead to unintended consequences. For example, in the wake of the 2008 crash, central banks inundated the market with liquidity in an attempt to increase the appetite for risk, in order to allow the markets, and the economy, to grow again.
The problem with the regulation, and I have been, in many cases, critical of the latest approval process, is that in too many cases, regulations happens only as a response to extreme events or fraud cases.
A decade later, that liquidity is still there, and consequently all asset classes, over the last eight years, have grown, not because the underlying value of the economy has improved, but because of that liquidity. On the other hand, regulation has forced the banks, investment banks in particular, to move to an agency-only mode and use their capital less to hold inventories. Hence, the net result is that the capability of investment banks to absorb excess assets is now dramatically reduced. So, you have, on the one hand, a market that is growing dramatically, the bond market, for instance, that in some cases has tripled in size over the last eight years, and on the other hand, you have a dramatically reduced capacity for banks to amortize because their capacity to hold inventory is radically reduced. This is one of the unintended consequence of regulation. Should the market start decreasing and falling, the risk has now shifted on asset managers, on the risk holder given that investment banks will be unable to absorb and limit the potential shrinkage of financial markets.
Regulation has forced the banks, investment banks in particular, to move to an agency-only mode and use their capital less to hold inventories.
HoT: What involvement do you have, personally, in technology procurement such as trading platforms and clearing platforms?
GM: A huge involvement. I am a strong supporter of technology. If you look at how the trading environment has changed over the last ten years, it’s exciting. Ten years ago most trades were done over the phone. Today, we’re talking about microseconds, HFT firms that employ military technology to maximise their trading speed; that’s how much the market has changed. Thousands and millions of trades happening every second. Once you accept that the trading environment has changed so dramatically, technology has to be part of your life. With the worsening liquidity situation in the market and the fragmentation due to the stricter regulation environment, technology has to play a major part in our investment strategy. Over the last three years, at Pioneer, we have made a significant investment in technology, and last year we completed the deployment of our global order management system, Aladdin, which is an global Order management System (OMS) with an integrated execution management system, with all the relevant connectivity.
As a large asset manager, we need to keep open as many sources of liquidity as possible, and in this type of environment, only technology is capable of giving you that possibility. The fragmentation of liquidity that has been generated by legislation, regulation and the change of market structure, has now made it impossible for people sitting on a desk, to go and look at every single venue. You need to have your order management system, your connectivity to exchanges, your smart order routing, an optimiser that allows you analyse the quality of execution that you have in every single venue, and so on. Today, we are connected, via FIX, to all major platforms; Tradeweb, Market Access, Bloomberg, TSOX, BondVision,. In addition, we have completed the implementation of the Global Trading Desk, which is one of the reasons we were given the ‘Best Multi-Asset Trading Desk of the Year’ award. It’s basically, a global integrated order book, on which all assets can be traded, leveraging local market expertise. So, if a portfolio manager in Europe wants to execute a US security, we can leverage on our Boston trading desk. Every order can be executed in the place where you have the best capability and in the local time zone, leveraging on the full market day. We feel that that will give us an edge vis-à-vis our competition, because it will allow us to enhance the quality of execution, to reduce dramatically the cost of trading and minimise the market impact over all.
With the worsening liquidity situation in the market and the fragmentation due to the stricter regulation environment, technology has to play a major part in our investment strategy.
I have to admit that I have always taken for granted the support I have received from the top management of Pioneer, but whilst talking to my peers yesterday at the 2016 Global Alpha Trader Forum I came to realise that management awareness in other companies is not at that level. In Pioneer, I’ve always found full support from a top management that understands the importance of building a strong technological platform, because if you have the right platform, you also minimise the operational risk, and so you can operate within a tight risk management framework.
HoT: What improvements have you noticed since Best Execution was introduced?
GM: The immediate improvement that I’ve seen is that Best Execution has forced asset managers to take more control of their orders. I come from a prop trading background and I can remember the time when execution desks at long only asset managers were very passive. A portfolio manager dropped a ticket to the trader and they executed the order. I think Best Execution has led trading desks evolve into much more than that, they have become more consultants of the PM as to where, when and how to execute their orders, now traders are taking more control over their orders. They manage their order form inception to completion, they select the venue where they execute their orders, and they select the type of strategy. Portfolio managers rely now much more on the traders’ view on how an order should be executed given certain constraints and market conditions. On those orders that are still outsourced and given to brokers, Best Execution has led traders to scrutinise more brokers’ activity and to evaluate the quality of execution of all trades that are executed by brokers, so it’s not a dark area anymore. We regularly perform a full comprehensive analysis of the orders that brokers execute on our behalf, including venue destination analysis.