Electronic Trading is more Data Driven, Empirical and Systematic

From Regulation NMS in 2005 to the fragmentation of liquidity across exchanges and ATSs, U.S. stock markets are no stranger to major change, but one that transcends them all is the seismic shift toward more systematic and empirical trading.

Perhaps more rigorously than ever, today’s trading decisions are data driven, and the pursuit of performance is iterative and scientific; institutional investors want to hear about trading technology that allows for the dynamic control of all order routing decisions, enabling experimentation and data that can be used to navigate an increasingly complex trading environment.

With its acquisition of Clearpool Group Inc. in April, BMO Financial Group signalled its ambition to establish itself as a North American leader in electronic trading. BMO has since accelerated its pace of growth and innovation, moving toward the development of a European offering, completing four new releases of its algorithmic trading system and introducing a new flagship liquidity sourcing strategy called ARC.

Last week, the firm announced the hire of industry veteran and thought leader Eric Stockland to the position of Managing Director, Electronic Trading, where a large part of his role will be to continue to develop innovative electronic trading solutions for BMO Institutional clients.

Following is an interview, edited for length, with Eric and Joe Wald, Managing Director and Co-Head of Electronic Trading, to discuss the outlook for the industry, its main challenges, and BMO’s plans to expand the business.

With nearly 20 years of experience in trading, capital markets technology and exchange operations, what would you point to as the most significant developments over your career?

There are plenty to choose from: the demutualization of the NYSE, Regulation NMS, the fragmentation of liquidity across exchanges and ATSs, the flash crash and subsequent regulatory changes, or, more recently, unbundling. All have been major events, but I think the one that really transcends them all, is this seismic shift in the approach of the asset manager to trading that has become a systematic and empirical process for them.

Today’s trading decisions are data driven, and the pursuit of performance is iterative and scientific. BMO’s position as a top 10 Bank, with unmatched relationships, will open a lot of doors, but ultimately, trading is about process and performance. It has become a far more rigorous endeavor in the past 20 years.

Looking forward, through a very educated crystal ball, what do you see on the horizon in general for electronic trading and specifically for algorithmic trading? It has come a long way, but what needs to happen next?

A persistent theme in trading has always been speed. Low latency and faster technology from vendors, exchanges and brokers is still a common narrative. What we’ve come to realize is that, while speed is incredibly important, how fast you are doesn’t have be the primary determinant of trading success.  What we are seeing in the marketplace are venues competing on execution quality by marginalizing the role of speed in trading outcomes. For example, CBOE recently launched their QDP feature, IEX has their crumbing quote signal to protect resting orders, and Imperative Execution is using AI to match orders and minimize adverse selection. In Canada, we have TMX Alpha Exchange and Aequitas NEO who both have innovative ways to limit adverse selection. These are just a few examples of trading ecosystems where the big trend has been to marginalize the role that de minimis amounts of speed play in trading, and that is to the tremendous benefit of the agency broker dealer and their client. The market is offering alternatives where firms can get a very high quality trade without having to compete in single digit microseconds of the speed race.

How do technology, market structure, and quantitative analytics play a role in this evolution, and what should institutional investors come to expect from their brokers? And what is it that you can provide?

When you start a conversation about technology, a lot of folks in this industry will immediately equate it to latency, but when we think about technology, it’s the adaptability and flexibility component that we want to lead with. The market and our ideas around trading are constantly evolving, and our clients’ needs are highly customized, so really, technology is the enabler to set the pace in this highly competitive market that keeps us up to date with the constant change. And up to date doesn’t mean reading through SEC filings … up to date means being an action leader and saying, ‘We are going to be early to market if not first to market, we are going to run tests and we’re going to put results out to our clients to talk about the impact of variable changes in the environment, to the trading process, and that’s not possible without a terrific, flexible technology platform. (In fact), one of the things that really attracted me to BMO was the Clearpool acquisition and them buying a best-in-class, highly-flexible technology platform.

What was your gut reaction when you heard about BMO’s acquisition of Clearpool?

The first reaction was, ‘I can’t believe it took someone so long to buy this platform.’ Clearpool is such a flexible platform – they thrived by enabling brokers to assemble customized solutions and it just made sense that a firm investing in electronic trading would want to lead with that type of technology.

Now that you are at BMO, what happens now? How do you plan your strategy around your role? Is it around what clients are asking for, or is the trick to predict where the market is going?

Predicting where the market is going isn’t necessary, but staying in constant communication and collaboration with clients is the bedrock of our approach. Themes around benchmark performance, experimentation, venue analysis and new offerings are sort of transcendent in electronic trading, and our solutions will evolve with them and the needs of our clients.

It’s the specific details for each theme that are changing all the time, and it’s where communication and collaboration become so important. Client conversations start by listening to your client, exchanging ideas, collaborating on a roadmap and then executing on it. We don’t reach an end point on these themes; we keep thinking about how to make it better tomorrow.

How flexible do you have to be? How quickly does the market change? How often do you need to be rejigging an algorithm?

Some of the events that require testing and tuning are fairly obvious. For example, there are three new stock exchanges that have launched in the last quarter – the LTSE, or Long Term Stock Exchange, the Members Exchange and the Miami Exchange – and those are events that we have to be there for from Day One, and thinking about how they fold into the trading process for our clients.

Other events can take place more subtly, and you have to dig and be a practitioner to be aware that they are happening, like slight changes to fill rates or fill quality on a venue. Having the data to spot these subtle trends and the framework to test changes might not be a headlining experiment but the little details can be very cumulative in performance.

So, it’s about knowing what’s happening, reacting to those observations and testing them. Sometimes you know what you need to test and compare for, and other times you are sifting through the data and you are talking to your clients and ideas bubble up. I would say the backlog of ideas and experiments that we want to run is boundless and it’s constantly shifting, so we are looking at this list to plan out those items that have the highest potential value for our clients and for their trading needs.

What are the biggest challenges you expect to face? How will you apply your skillsets in helping BMO transform the electronic trading experience for institutional investors?

I think one of the top challenges is the general skepticism of the client base. That’s where we lead with the data, and we lead with strong, rigorous approaches to trading and to evaluating trading. Data brings a level of credibility to the things we are saying. I think that is how we overcome the over-brokered skepticism from buy side folks who’ve heard it before around signals or collocation or latency or machine learning. We need to show how our approach is moving the needle on performance versus the benchmarks that our clients count on.

To close it out, Joe, is there anything you would say about future goals? Can we expect systematic investment over coming years?

There’s no question that we will continue to invest. That is what leaders do, and that’s what winners do. They never become satisfied or complacent. That is not our history and nor is it BMO’s. The acquisition (of Clearpool) in and of itself was a tremendous signal to the market that BMO is coming in to become a real player and a leader in the space. The new hires that we have brought on, Eric coming on, Europe getting going, all of these things speak to continuous investment and the goal being clear to be a leader in the space.