AsianInvestor quizzed Richard Coulstock, director and head of equity dealing at Prudential Asset Management (Singapore), on the relatively high cost of trading equities in Asia. He discusses the outlook for alternative venues and dark pools in the region, and voices his views on commission-sharing agreements and best execution to preserve fund value.
Do you welcome the development of Chi-East’s pan-market dark trading platform?
We welcome any initiative that helps us to trade more efficiently and therefore produce better trading or investment results for our clients. The ability to seek natural liquidity and anonymously cross large blocks of stock is very important to an asset manager of our size. Yes, we welcome Chi-East.
Is it important in terms of the industry’s development in Asia?
Competition with established exchanges brings down execution costs and encourages new investors to enter the market. Monopolistic, expensive and highly regulated exchanges tend to see fewer participants and lower liquidity. If you want to develop the investment industry in this region you need to introduce competition, or at least the threat of it, to make markets more attractive to investors. That said, a degree of caution is always advisable and in addition to learning from developments in other regions, Asia can also learn from any mistakes that may have been made elsewhere.
Will it be an important development of driving down trading costs in Asia?
Competition tends to reduce costs for market participants, which in turn benefits our clients. Sometimes, however, just the threat of competition alone can have an impact if regulators make changes that remove the need for competition in the first place. For example, regulate for lower costs and narrower spreads.
What developments do you anticipate in terms of lowering Asian trading costs?
There has been a slight domino effect as dark pools have entered Asian markets in recent years, and I would expect that to continue and dark pools to move into more markets as time passes. I would welcome developments in India, one of our largest trading markets, as we have found that information leakage can be costly there. To be able to cross large blocks anonymously in India would be a welcome step forward.
What sort of growth do you anticipate in dark pools in Asia?
Slow but steady would be my expectations. We operate in a multi-market, multi-regulatory environment without a single regulator to instigate pan-Asian reforms. I think a larger growth area will be in electronic trading, with buy-side dealers taking greater control of their own execution.
What is the significance of having a central clearing platform?
The benefits boil down to costs, overall efficiency and control over margin money management. A central clearer would facilitate cross-border trading and allow exchanges to compete for order flow, possibly reducing trading costs for asset managers.
What are the key things you look for in terms of trading execution?
Our methodology revolves around reducing or avoiding market impact. In essence we want to avoid trading styles that cause prices to move away from us before we have completed our trade. To do so, we increasingly seek to cross blocks of stock either against natural flow we find in the market or in dark pools.
How do you monitor trading costs?
We use a third-party analytics provider to study our trading results and highlight areas where we can continue to work to improve results. We split our studies by broker, market and trading style down to a granular level in a never-ending drive to reduce costs. Each month we will discuss results with our core counterparties and if there are areas of concern we will work together to ensure they are addressed. In addition, each counterparty will give us their own analysis of any electronic/algorithmic trading we have done with them. Again, we go down to a fairly granular level and work together to ensure we can both understand and act upon any areas of concern, should they arise.
Do you use commission sharing agreements?
We have commission sharing agreements in place with each of our core counterparties. At a high level this allows us to use execution results as a basis for future order placement and to seek out flow with whichever counterparty we believe will give us the best overall execution result. Our goal is always to seek out the best results for our clients and to trade in the most efficient manner possible. Using research targets as a basis for placing trades with brokers is, thankfully, becoming an outdated methodology.
How important do you feel best execution is for your end-investor in terms of preserving fund value?
We look on dealing as an integrated part of the overall investment process, not a standalone operation. “Best execution” will mean different things to different people; it is more a principle or a guideline than a clearly defined system of trading. Prudential Asset Management has a process which is repeatable and independently measured and our trading goal is to reduce market impact or, to put it another way, minimise trading costs and improve overall performance for our clients.
Do clients ask you to prove that you are doing things efficiently?
Yes. Increasingly we find that clients specifically ask how we control execution costs and monitor trading activities. This is an important aspect of their due diligence process.