Mifid II and the rise of the market structure guru

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If the answer is yes, then you’re probably one of a small but growing band of market structure specialists within banks, brokers and other trading firms and your expertise is in hot demand.

Jobs with titles such as ‘head of market structure’ barely existed in Europe less than 10 years ago. But they are roles that have quickly taken on strategic importance as firms align themselves with new regulation and clients demand a helping hand to navigate an increasingly complex trading landscape.

Headhunters say the roles – which typically involve keeping up to speed with regulation, advising internally and externally on the impact of new laws and trading initiatives and analysing execution quality – now command big salaries and many clients feel this is money well spent.

Christoph Hock, head of trading at German fund manager Union Investment, said: “Being provided with market structure and regulatory expertise by our executing brokers is absolutely key to us and is a factor we take into account during our semi-annual broker review process across all asset classes”.

The vast majority of trading may now be done electronically but this demand for a human touch is causing established providers to expand their market structure teams and those in an emerging or rebuilding phase to create them. Citigroup, Goldman Sachs and Jefferies are among those to have recently been hiring for such roles in Europe, people familiar with the situation said.

Natan Tiefenbrun, a managing director in European execution services at Bank of America Merrill Lynch – regarded as one of the leaders in the space – said: “We took the view a few years ago that electronic trading was becoming increasingly competitive but that a sustainable differentiator would be to have specialists who could discuss good practices in best execution governance and broker evaluation, talk in detail about the merits of different trading venues and market models, and assess the implications of changing regulation on the buyside, sellside and on venues.”

Caleb Wright, the bank’s head of market structure and execution consulting, added: “We have always seen client interest on market structure but the audience is now broader than before – including chief investment officers, chief operating officers and business heads in addition to traders – and the focus has become more intense as regulatory developments such as Mifid II start to crystallise.”

Evolving out of equities

Many banks created market structure advisory roles in their equities divisions after the EU’s 2007 Markets in Financial Instruments Directive – which overhauled the region’s equity markets – to help them stay abreast of the changes and talk clients through the explosion of new trading venues. The second version of Mifid, coming into force in 2018, is set to have an even more profound impact, putting new obligations on the buyside around reporting and best execution and ushering in a new era of transparency across the trading lifecycle. And it will apply across multiple asset classes, causing trading techniques to converge.

It has pitched Mifid-savvy experts into the limelight, both with clients and acting as advisers to a firm’s most senior levels of management as research, trading and advisory franchises are restructured to adapt to the new regulation.

Joelle Tarrant, head of market structure for Emea at RBC Capital Markets, said: “It is very much a multi-faceted role. Internally it can be used to educate and drive strategy.”

Mifid II’s reach has meant that while banks once had a single person fulfilling the role within equities, most now have small teams of experts across the globe and covering every asset class.

Vladimir Khandros, global head of market structure and execution consulting at UBS, oversees five people and said his team was now “truly global and increasingly thinking about other asset classes beyond equities”. He added: “This reflects the way many regulators and our clients are seeing the world.”

The backgrounds of those currently in the roles range from trading, technology or consultancy positions, to law firms and other trading venues. That background often determines the depth to which the person is focused on analysing execution quality. But according to Marcus Newman, an executive director at City headhunter Sheffield Haworth, to be broadly successful “you need to know products in-depth across the specified asset classes, have depth of comprehension of the regulatory environment, have strong relationships with exchanges and have gravitas to explain how that impacts the business whether that be with senior people internally or external clients.”

Reporting lines vary, though most still sit with electronic trading teams and report to heads of electronic trading, reflecting where many believe the role retains the most importance. That is all the more so ahead of Mifid II and due to numerous regulatory investigations into brokers’ electronic trading divisions, which have prompted the buyside to demand much greater transparency about broker practices, particularly around dark pools.

Tiefenbrun said: “The buyside continues to demand even greater transparency from their execution providers, so having a team in that seat that can explain how BofAML plans to amend its algorithms or order handling to address Mifid II gives clients confidence in our preparedness.”

No money attached

Despite the value placed on market structure advice by clients, the positions can sometimes be difficult to justify internally because they do not directly generate revenues as the research is provided for free as part of a firm’s execution service.

Newman said it was a “difficult role to monetise, as there is no P/L attached”. This has caused some organisations to give market structure responsibilities to its strategic investment arms, equities COOs, or heads of electronic execution sales – or even second existing employees into the position for a period. The latter has particularly been the case within fixed income, currency and commodities franchises where, Newman said, it was still a difficult role to directly recruit into because most banks would rather hire a trader who could generate revenues.

However, Khandros said UBS was “increasingly seeing meaningful results” of his team’s work, be it from product development or client feedback. He also said market structure insight was a factor increasingly being considered by asset managers when allocating client dealing commissions to executing brokers during the so-called ‘broker vote’ process.

“Our clients are increasingly leaning on us for much more in-depth analysis,” he said. “In the past, questions were mostly from trading desks but now are also coming from portfolio managers, CIOs and COOs, for example.

“This is because changes to the markets can have potentially significant impact on fund performance and workflows.”

And the advice helps with general client relations, said Tarrant, who explained: “It provides the basis for in-depth conversations with clients on a range of topics including regulation, technology, microstructure and their impact on equities, and it allows us to broaden the firm’s relationship with them and understand their needs.

“Market structure is becoming an increasingly integral part of the overall execution offering.”

Research or execution?

Clarifying the work as part of execution is necessary as questions have arisen over whether market structure advice may be deemed a trading inducement and worthy of being paid for explicitly. Mifid II takes a hard line on trading inducements, and requires any service provided by brokers that is not directly related to execution, such as investment research, to be paid for separately or in a transparent manner.

However, practitioners believe that market structure is merely additive to the execution service.

Joe Gawronski, president of Rosenblatt Securities, a US agency broker which has carved out a niche for its in-depth market structure research, said: “While we do sell our research to exchanges, regulators, prop firms and others with whom we do not have an execution relationship, it’s not something for which we expect an explicit payment from the buyside.

“If we’re providing information and advice to help a firm make better routing choices and improve their quality of execution, it’s part of the execution experience, so I do not see how that could be construed as a trading inducement.”

Union’s Hock agreed: “We believe when consuming these services it is helping us to provide best execution and benefitting our clients”.

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