First State Investments is moving to electronically access dark pools and other sources of alternative liquidity. Other changes aimed at improving execution efficiency are also under way at the international arm of Australia’s Colonial First State Global Asset Management.
The firm already uses buy-side crossing network Liquidnet, but has not otherwise traded electronically, says Todd Prado, global head of equity dealing in Singapore. He joined in July from rival asset manager Janus Capital, where he had made significant use of dark pools and trading algorithms.
First State plans to have Bloomberg’s EMS-X execution management system in place in the next few weeks, enabling it to use broker dark pools, other venues like Chi-X and Instinet, direct market access and algos.
“Our biggest constraint is liquidity, and that’s where dark pools and crossing networks like Liquidnet help,” Prado tells AsianInvestor. “We’re using Liquidnet now a lot more than we were [before I joined], and once we have the EMS-X platform set up, we’ll get the brokers plugged into it.”
However, connecting to dark pools raises the issue of what kind of flow one is exposed to. Prado says he has already made it clear to brokers that he wants zero exposure to high-frequency traders.
“High-frequency traders hold themselves out as liquidity providers – I totally disagree,” he says. “But they’re a fact of life. I have to deal with them in the market, but I don’t want to deal with them in a dark pool. So if a broker insists on putting them in the dark pool, I won’t use that broker.”
In terms of algo benchmarks, says Prado, “we’re going from a Vwap [volume-weighted average price] approach that’s been used previously to more of an implementation-shortfall type of benchmark”. Implementation shortfall is the difference between the decision price and the final execution price, including commissions, taxes, etc.
In addition, First State in August contracted agency broker ITG to carry out transaction cost analysis (TCA). The firm had previously used Citi’s multi-broker post-trade Best Execution Comparison Services (BECS) product, which was bought by TradingScreen in January. TCA is used to achieve best execution, control trading costs and bring greater efficiencies to trading operations.
Other changes are also afoot in First State’s trading set-up. Prado’s global equity dealing group currently trades on behalf of five internal investment teams, but that will be expanded to seven in the near future.
First, the group is in the process of taking over trading for Real Index, an index investment subsidiary of First State's parent, Commonwealth Bank of Australia, which is bringing the unit’s dealing function in house. And in a few months’ time, Prado’s group will start trading for First State’s multi-asset strategy team.
Meanwhile, First State portfolio managers are considering starting to invest in Bangladesh, which would mean the dealing team executing in that market. The firm already trades all the main South Asian markets, including Sri Lanka, but not Cambodia, Pakistan and Vietnam.
*See the upcoming October issue of AsianInvestor for more from this interview with Todd Prado.