Neil Bond, Partner and Equity Dealer at Ardevora Asset Management LLP

N.Bond-26HoT: Please tell me about your background and the career path that has brought you to your present position.

Neil Bond: After my A Levels, I started work in the City at Phillips & Drew as a management trainee, which in effect was an apprenticeship. It involved working three years in all of the back office departments for 6 months at a time. My first assignment was to the new issues department which had been very busy with the privatisations of British Airways, British Gas etc. These years gave me a good understanding of how things worked behind the scenes of trading.

I was lucky enough to move to the front office after that where I cut my teeth as a desk assistant on the European research sales team. It started with plenty of coffee and dry cleaning fetching but I pretty quickly built up a client base of my own and I ended up selling European research to the Far East.

Then, I got an opportunity to go to the States to work with Fidelity. They had a brokerage outfit in Boston and London but they wanted the European product marketed to US institutions.  I got quite a big break there because my boss left after about a month and I was put in charge. It was quite a fast learning curve in a different country. After three years at Fidelity I moved to ITG who had pioneered electronic crossing. ITG want to replicate their US success in Europe and after two years they opened up their London office and I moved over to London bringing my US clients with me. A lot of the US clients were trading programmes and baskets in POSIT and asking us to trade the balances. So, it became apparent very early on that we needed a programme trading team there and with the help of some technologists I built that up from scratch. Within three years we’d gone from zero to being ranked by Institutional Investor higher than some bulge bracket brokers, which was a sign that we had a lot of respect and support from institutional clients.

I think that Bear Stearns was the catalyst for the market meltdown as they had been pioneers of mortgage-backed securities and I think that they were doubling up on their bets when things were going wrong which is a lesson that was not learned from the long-term capital management debacle.

After ITG I went to Bear Stearns where I ran sales on the programme trading team for a couple of years. I left there just as the subprime lending fiasco began to unfold. I went over to Sanford Bernstein where they had a well-respected research team and traditional sales trading team, but they didn’t have any electronic trading or programme trading in Europe. My old boss from ITG had gone over there to set that team up and I went to work with him again.  A couple of years after that I went to Cazenove on their electronic team. When they merged with JP Morgan I looked for a smaller team to work in, so I moved to Execution which was then taken over by Espirito Santo and is now Haitong. I continued a lot of the work we had been doing at Sanford Bernstein where we had an amalgamation of algo providers, or dark pool providers, so I went from a programme trading background to increasing my exposure to the algo world and my speciality then developed into dark pools.

After Execution I decided I moved onto the buy side and I’ve been here for just over two years. When I joined we had twelve people, now we’ve got 25 so it’s doubled in size. The assets are growing very fast and we have surpassed several significant benchmarks and are still growing fast. There are two of us here on the trading team and we divide the work between us. We’ve both got different skills so each of us takes whichever trades that suit our specific skill set, but it’s very much a team effort.

 

HoT: What are your current trading strategies? 

NB: We invest in equities using a cognitive psychology approach to stock picking. The fund management team look at company management and the sort of mistakes they are make, whether they are over confident or overambitious. Then they look at mistakes and trends the analysts are making, particularly when they might be struggling to understand a company and make accurate forecasts. Lastly, they look at how investors might be misreading the market or susceptible to biases. We try to bear some of these factors in mind when we are trading their orders. The stocks selected by the portfolio management team are often tricky midcaps where our trading skills are put to the test. They can be quite high percentage ADV with a high expected cost of execution. Our primary benchmark is arrival price, we strip out expected cost and monitor for reversion, we then compare to a number of different benchmarks to see if we may have got a better result had we selected an alternative trading strategy. Where possible, we take a very passive approach to trading. If we have inflows, they’re priced that day so we generally have to trade them more urgently to match the fund pricing time, but when we’re making changes to our model portfolio we can take a bit more time over our implementation.

It was still a very tricky market place, particularly in the electronic world; where electronic traders got the blame for the velocity of the market crashes. It was an interesting time.

Our UK portfolios have the highest ADV names and are at the trickiest end of the spectrum. Traders have discretion as to when and what price to execute. This can often be several months; other times we may find a block almost immediately which is preferable for us as it eliminates opportunity risk. We look at the expected time horizon, the expected cost and make our trading decision based on those parameters.  We divide our trading up into three main streams; programme trading, cash sales trading and algos. It’s about 30-30-40 with 40% being the programme trading. The programme trading tends to match our requirements for our global trades especially where we’re moving assets from one region to another, it’s more efficient to manage it in one place. We will extract any names with a high difficulty and try and trade those ourselves to make the programme trading desks more straightforward then we can spend our time trying to source liquidity in the more difficult names. We have a wide range of liquidity sources at our disposal, but sometimes it’s just not there and if it’s not there, trading in the lit venues is likely more impact than we are prepared to accept.

We try and stay under the radar as much as possible and rarely work orders in the lit market unless it’s the very end of an order because we just find that even with a low participation rate like 4% or 5% ADV we can still have impact. Our lit market participation is largely centred on the auctions where the polarisation of flow helps reduce impact. I’m not saying that we don’t have impact if we trade in the darks because you can certainly have some leakage and impact but you’re guaranteed leakage in the lit markets.

We don’t have any research bills to pay because while the PMs look at the analysts’ reports, they’re not looking for idea generation, they are looking for trends/patterns whether they’re laggards or leading indicators, whether they think that analysts are looking at the right thing, or they’ve interpreted the management’s messages in a certain way; they’re trying to find those biases. This leaves the choice of trading venues and partners at the traders’ discretion. We always trade on an execution only basis, and measure our brokers using a number of metrics on a semi-annual basis. The type of things we look at are; the likelihood of getting a fill, the price moves and reversion when we give orders to a broker and just the level of service we get, and how hard they work to find us the other side of trades. We occasionally avoid brokers where we have had a negative experience, but we are happy to have a long broker list because accessing liquidity at the source has its advantages.

 

HoT: What are your memories of the 2008 crash? What lessons do you think have been learned from that event?

NB: I managed to get poached away from Bear Stearns just as it was all unfolding. I think that Bear Stearns was the catalyst for the market meltdown as they had been pioneers of mortgage-backed securities and I think that they were doubling up on their bets when things were going wrong which is a lesson that was not learned from the long-term capital management debacle. I was on gardening leave for the three months when the two funds went bankrupt, I couldn’t really understand how funds could go to zero.  I thought there must be some residual value and it became clear very quickly that there was no residual value to these funds and that no one had been pricing any of these things properly. That was likely the catalyst that led to the Lehman’s collapse and a generally bad time for everyone. I did get back into the market again three months later so I got out at the top and got back in again at the bottom three months later. But it was still a very tricky market place, particularly in the electronic world; where electronic traders got the blame for the velocity of the market crashes. It was an interesting time.

I think that one of the things that came out of the Bear Stearns and the Lehman’s collapse is the proliferation of risk management and compliance. Compliance departments and risk management departments are generally two or three times the size of a trading desk so a lot of our time is spent on making sure we are meeting regulatory requirements. Have they learnt all the lessons that they should have learned from that?  I don’t think they have which is why we’ve got MiFID II coming in with a lot of emphasis on best execution.

 

HoT: How are you being affected by new regulations such as MiFID II?

NB: MIFID II has now been pushed back to 2018 and I think that’s probably because the fixed-income world has a lot of work to do if they are to abide by the same rules as the equities markets and they are a very long way from being able to do that, because their market is nowhere near as transparent as equities. I suspect that something’s going to have to give. I don’t think even by 2018 that the fixed income world is going to be fully ready for this.  However, I think that when change does happen in their industry, if it’s forced upon them, it will happen very quickly.

Compliance departments and risk management departments are generally two or three times the size of a trading desk so a lot of our time is spent on making sure we are meeting regulatory requirements. Have they learnt all the lessons that they should have learned from that?  I don’t think they have which is why we’ve got MiFID II coming in with a lot of emphasis on best execution.

What does MiFID II mean for us? I think one of the main aspects will be our treatment of research. We place a very low value on the on research we consume. The dark pool caps will have some impact. I think that there’s quite a lot of change afoot that is going to equalise that situation. I think people are a somewhat hesitant to come forward with solutions too far ahead of the rule changes in case new rules squash those plans. There are going to be some transparency rules which may suit us in some cases and not suit us in others. A common view is that dark pools were originally designed to trade big blocks, I believe they were designed for minimising market impact and that resulting big blocks are an added bonus. I think they have been a valuable tool for traders. They may have a negative effect on price formations and the primary exchanges have had to work hard to keep meaningful market share.

I think that it’s going to be a very different marketplace in 2018 because so many things are changing to help traders find blocks without showing their hand. Displayed markets may not get the increased market share that the regulators are hoping for with MiFID II. MiFID I tried to encourage competition and the unintended consequence of that was a very fragmented market place. I think we’re going to see a lot of fragmentation of dark liquidity now, most exchanges seem to be embracing hidden liquidity order types and I think BCNs will be replaced with MTFs or SIs to some extent, with newer venues like Turquoise BDS, BATS continuous auctions and BIDS rising to solve the liquidity conundrum.

 

HoT: What involvement do you have in deciding which trading and clearing platforms the firm uses?

NB: Since I’ve been here we’ve implemented two major changes. We’ve decided to get a third party to do our TCA analysis and that seems to be going very well; we now have a much better picture of where we’re trading, why we’re trading, how well or badly we’re trading. The second thing we wanted to do was to put in a more sophisticated execution management system. We are in the process of switching over from Bloomberg’s EMSX to InfoReach’s system.  For our needs it’s more suitable, it’s more customisable, it’s more flexible and, most importantly, it’s more scalable. If we add different strategies, if we need to monitor things in different ways and we can customise Inforeach to our specifications.  So, those are the two big infrastructure changes that I’ve made since I’ve been here and I don’t really foresee any more changes necessary than that for the near future.

I think people are a somewhat hesitant to come forward with solutions too far ahead of the rule changes in case new rules squash those plans. There are going to be some transparency rules which may suit us in some cases and not suit us in others. A common view is that dark pools were originally designed to trade big blocks, I believe they were designed for minimising market impact and that resulting big blocks are an added bonus.

 

HoT: How have things improved since best execution was introduced?

NB: Best execution is a very broad ranging area. I think in the last few years we’ve seen the buy side empowered with a lot of the sell side trading tools. With that power comes responsibility meaning you have to measure how well you’re doing. But just getting best execution is not enough, now you now need to prove best execution. There has been too much reliance on the sell side to deliver best execution and there needs to be more accountability on both sides. The buy side needs to measure execution services themselves more and understand the results. The sell side needs to understand the buy side’s needs and objectives clearly. Both sides need to be able to explain what decisions are made and why they made them at every step of the investment process. There is quite a high level of granularity required, which I think is a good thing because the more people think about the way they trade, hopefully, the better traders they will become.