Mike Bellaro and Nej D’jelal, co-chairs of Plato Partnership, describe the not-for-profit company that aims to improve the trading experience in equities as “a movement.” They said the movement is just getting started and will expand from Europe to the US and Asia.
Bellaro, Plato co-chair and global head of equity trading at Deutsche Bank Asset Management, told Markets Media: “In 2018 the buyside will be going through the biggest change in trading since the Big Bang in 1986, and could sit on the sidelines and do nothing or step forward and have a say. There is no way changes in European market structure will not be exported to the US and Asia."
In September last year Plato Partnership announced its formal creation as a not-for-profit industry group representing asset managers and broker dealers with the aim of improving market structure, and achieving better results for the end-investor, in Europe. At the same time, Plato also announced its first partnership by entering into an agreement with Turquoise, the London Stock Exchange Group’s pan-European multilateral trading facility - the first between the buyside, sellside and a trading venue.
In March this year 15 new partners joined including Instinet Europe, Jefferies, Legal & General Investment Management and Standard Life Investments. Steven Way, head of equity trading, Europe, at Standard Life Investments, said in a statement: “Simplifying market structure and reducing trading costs requires input and insight from the broadest possible range of market participants, which is central to what Plato Partnership is working to achieve.”
The following month asset manager Baillie Gifford joined as a founding member and JP Morgan took on full member status.
D’jelal, Plato co-chair and managing director, head of electronic equities product, Europe, Middle East and Africa at Barclays, told Markets Media that the problems Plato is answering are not limited to Europe and the movement will grow to the US and Asia.
“This is solved by bringing the right people together - buyside, sellside and a venue - and a not-for-profit commercial dynamic,” added D’jelal. “The financial proceeds from Plato will fund research and academic partnerships to inform the community and future regulation."
Plato's fully funded not-for-profit model is unique, according to Bellaro, and allows the partnership to act as a vehicle to bring market participants together, provide key intellectual capital and bring efficiencies in trading. Plato’s Market Innovator (MI3) will produce independent research and analytics which will be open to peer review and the first piece is scheduled to be published in June.
Bellaro continued: “The buyside wants data and analytics to help traders become more informed about trading decisions as we head into the new world of MiFID II. There will either be a fragmentation of block trading or a race for speed so transaction cost analysis is an urgent requirement."
MiFID II, the regulation covering financial markets in the European Union from January 2018, will change trading by introducing double volume caps on dark pool trading and not allowing brokers to cross internal flows without registering as a systematic internalizer. However Large In Scale (LIS) trades, above a certain size specified by the European Securities and Markets Authority, are exempt from the dark pool volume caps.
Bellaro said: “Under MiFID II block trading will become the norm, rather than breaking down trades into smaller orders. The Turquoise partnership was a logical solution and the results have been fantastic."
Plato did not take an equity stake in Turquoise in order avoid a conflict of interest and as an MTF, Turquoise Plato is required to treat all clients equally, regardless of whether they are Plato members.
Dr Robert Barnes, chief executive of Turquoise, told Markets Media in March that Plato selected Turquoise as a partner following a comprehensive tender process involving some 20 firms.
Turquoise rebranded its dark services as Turquoise Plato Block Discovery and Turquoise Plato Uncross. Uncross features random intra-day auctions which happen more frequently in more liquid stocks, making it harder for the auction to be targeted by aggressive trading strategies. Block Discovery facilitates trading in larger block orders by electronically matching block indications. On identifying potential matches, the service requires participants to send firm qualifying block orders to Uncross and their behaviour is monitored.
“A decade ago the sellside and exchanges met to decide on the principles of market structure,” Barnes added. “Now the buyside is focussing on block trading in an era of low returns and negative rates.”
He continued that the average size of trades on Turquoise Plato is between 10 and 25 times larger than the average in other dark pools.
Broker ITG recently found that the total volume of electronic equity block trades in Europe rose from €20bn ($23bn) in the first quarter of last year to more than €40bn in the first three months of this year. Volumes were aggregated across Turquoise Plato Liquidnet, ITG Posit Alert, and Bats LIS. As volumes of electronic block trading increase, there need to be new ways of measuring trade performance that are universally accepted.
"At Deutsche Asset Management we have worked on bringing back blocks for years and we executed more blocks last year than in the past five years combined,” added Bellaro. “The record volume of blocks has led to alpha preservation.”
D’jelal said: “Block trades need to be compared on an apples-to-apples basis. Although this will not be possible for every single trading scenario, there can be standard use cases and commonly understood benchmarks.”
In April this year Plato announced an agreement with LiquidMetrix, the best execution specialists, to measure block trade performance. Plato will work with the LiquidMetrix’s research and development team to jointly design and implement a consistent framework for assessing block trades.
Bellaro said: "The agreement with LiquidMetrix looks to solve the problem of post-trade analytics for a block trading world. There is an opportunity for new benchmarks, next generation TCA and analysis of indications of interest."
In addition, MiFID II requires both the buyside and sellside to provide evidence to their clients of how they have tried to achieve best execution. In order to meet help meet this requirement, Plato signed a collaboration agreement with Trade Informatics PLIA in March this year. PLIA helps streamline counterparty due diligence and facilitates the transfer of information between asset managers and brokers for risk management and best execution policies.
"For asset managers, MiFID II increases the importance of governance of the execution process so the deal with Trade Informatics' PLIA is central to building a framework for surveillance and algo usage,” said Bellaro.
The agreement formally grants Plato Partnership’s members optional access to the PLIA platform, a cloud-based counterparty management and compliance solution.
D’jelal said: “Solutions such as PLIA provide a simple and efficient approach to a non-trivial data workflow challenge. Such standardisation simplifies the execution process and contributes to cost reduction, which is in the interests of end investors and a core focus of the Plato Partnership community.’”
Bellaro added: “Two years from now Plato Partnership will have expanded from Europe and will be bringing change globally. In five years we want to look back and have revolutionised trading for the better for end-investors, which is not limited to equities.”