Dow Veeranarong and Andrew McCardle of EquiLend Asia believe trading desks can do more with NGT
Dow Veeranarong, Global Product Owner, EquiLend, and AndrewMcCardle, Head of EquiLend Asia, believe trading desks can do morewith NGT
Can you begin by telling us about the origins of NextGeneration Trading (NGT)?
Dow Veeranarong: We have been building NGT throughout thelast few years with the help of our client community. We have been looking at how they trade onour trading venues and discussing ways to make their processes more efficient. It is anongoing, iterative process. The result should improve the way people are communicating pre-tradenegotiations through trade execution.
Given the current tough environment for investment banks, dobusiness heads view NGT positively or myopically as added IT cost?
Veeranarong: At EquiLend, we recognised that our existingtrading venue, AutoBorrow, could be more flexible. Everyone is looking for operationalefficiency. Everyone is under pressure to do more with less. NGT offers the opportunity for increasedautomation across the platform. For our clients, NGT is an investment in their own connectivity. Enhancedconnectivity means more automated flow. It is true that firms have to invest and upgrade theirown trading platforms. There are some upfront costs involved when it comes to system upgrades, and firmswon’t invest those IT dollars without seeing benefits. Clearlyclients see that benefit, as firms all around the globe are building to NGT.
What do clients see as the appeal of NGT? Is it thereduction of manual trades?
Veeranarong: Yes. Negotiations by email, messaging or phonetake time. NGT allows lenders to publicise their available inventorymultiple times a day. It allows brokers to respond efficiently. It cuts downon much of the back-and-forth of traditional trading. When party A andparty B agree a rate, then it can be straight-through-processed into theirproprietary systems.
Andrew McCardle: NGT also cuts down on mistakes caused bymanual inputs. There is always the chance that someone puts the decimal point in the wrongplace. Automation reduces the chances of that kind of human error happening.
Does this mean an end to the human element in brokingtransactions?
McCardle: Certainly not. This does not change or replacerelationships. We would argue that greater operational efficiency achieved by NGT frees up moretime to concentrate on the harder trades and to do them better. Just because NGT is moretransparent does not mean that a lender shows the same rates to all parties. Instead, it permitsbetter management of the rates being offered to each party.
What is your client base in Asia?
McCardle: The vast majority of trades in the region forEquiLend have been offshore to offshore. Historically, much of our business in Asia has beeninternational players trading with each other. That is changing. In Japan, for instance, the three largesttrust banks are users. We have found that as domestic firms learn about what the international firmshave been doing, they tend to come onboard.
How does the business look geographically?
McCardle: We are most established in the most developedmarkets in Asia-Pacific, including Australia, Japan, Hong Kong and Singapore. Markets such asAustralia are as sophisticated as any in the world. There is certainly revenue to be made in otherregional markets, but the developed markets will continue to be important in the future. Weshould not lose sight of the fact that while the percentage of hard-to-borrow stocks in other Asianmarkets may be higher, the more developed securities finance markets in the region are so big that, inabsolute terms, they are important sources of business for many firms. Having said that, there is greatpotential growth for NGT in emerging markets within the region. We expect to see that more andmore in 2016 for markets such as Korea, which has a record of producing large revenue drivers, butalso Malaysia and Taiwan because of the relative weighting toward hard-to-borrow stocks in thesemarkets.
Given 2015 was a record year across Asia for securitieslending, has this encouraged adoption of NGT as part of sensible investment for thefuture?
McCardle: Yes. Record years are always good, but bydefinition that means they have been very busy. This is where NGT comes in.If you think about North America, which is predominantly a generalcollateral (GC) market, most stocks are going to trade around 25bps orbelow. In Asia, securities tend to be harder to locate and thereforehave a higher fee on average. By virtue of letting lenders push out theirprices more transparently and with automated pre-trade negotiations,operations can become easier and more efficient to transact when using NGT.
Is NGT just for general collateral?
Veeranarong: Definitely not. We built NGT to createefficiencies in the warm and special trading environment in addition to GCtrades. With NGT, firms may continue to automate their GC flow, as theyhave historically done on AutoBorrow, but also their warmer trades as well. For special trades,the platform also allows traders to manually negotiate these higher-touch transactions. NGT works fromsystem to system (fully automated), from system to human (one side automated) and from human tohuman (manual). Therefore it covers GC, warm and special trades across equities and fixedincome, all in one place. Historically the various trade types would be conducted on differentEquiLend venues or via phone or email, so NGT creates efficiencies by bringing that workflow togetheron one platform.
What is your outlook for the years ahead?
McCardle: We have had a good year in Japan in particular.Clients there needed the benefit of workflow on NGT in action. We expect offshore to offshorebusiness to grow in Korea and Taiwan. That will filter down to local brokers and should encouragethem to sign up to the system. There is some domestic-to-domestic flow in the region already. For2016-17 we expect the work already done to give us a springboard to conversations in theemerging Asian markets. That way, we keep the collaborative spirit of NGT. Clients will help us focuswhere our priorities should be.
This article appeared in Global Investor/ISF's Securities Finance Asia Pacific 2016 guide.
