April 2011

The World’s Best Brokers Deutsche ousted as No. 1 in saving customers money on stock trades. Now, Germany’s biggest bank is betting its computers can deliver as markets splinter and volatility ebbs. by Nina Mehta and Nikolaj Gammeltoft

WORLD’S BEST BROKERS

Differential, ‘We’ve had a pretty good crisis,’ says Barry Bausano, smiling as he surveys in basis points* AG’s sprawling 35,000-square-foot equities trading floor in 1 Deutsche Bank 2.28 downtown Manhattan. Behind him, on bookshelves in his glass-walled office, sit two copies of Too Big to Fail, along 2 2.09 with Liar’s Poker and Triumph of the Optimists, which tracks 3 0.54 101 years of worldwide investment returns. Bausano, 47, who heads the -based bank’s equities 4 Liquidnet 0.33 division in the Americas, has reasons to be upbeat. Deutsche Bank got the best stock prices for institutional clients both 5 UBS 0.08 globally and in North America during the 12 months ended on 6 –0.09 Sept. 30, 2010, according to data compiled for Bloomberg Markets’ worldwide ranking of equities brokers. 7 Nomura Holdings –0.18 Germany’s biggest bank displaced Goldman Sachs Group 8 Jefferies –0.45 Inc., which had swept all four categories in the previous ranking. This time, New York–based Goldman Sachs was 9 Goldman Sachs –0.46 ninth in the world, fifth in Europe and third in Asia. The 10 data were compiled by Ancerno Ltd., a spinoff of brokerage BNY ConvergEx Group –0.49 Abel/Noser Corp. that measures transaction costs for * Difference between the broker’s actual loss (from the time the br­ oker $7.5 trillion of trades in more than 70 countries every year. received the order to the executed stock price) and the median­ result, While U.S. retrenched, merged, took government or benchmark, from a universe of similar trades. When the differential bailout money and—in the case of Hold- is negative, the broker missed the benchmark. Ranking is for the four quarters ended on Sept. 30, 2010. Source: Ancerno ings Inc.—declared bankruptcy during the financial meltdown of 2008 and 2009, Deutsche Bank overhauled its electronic stock trading and analytics. It hired computer BEST trading veterans, including Jose Marques from Credit ­Suisse Group AG, and rolled out algorithms that customers BROKERS can adapt to their needs. One program, called SuperX, re- sponds to instructions about how aggressive to be in filling BY REGION an order while tapping up to 20 dark pools—private trading venues that don’t display bids and offers in advance. The bank also boosted the historical and real-time data ana­ lytics that feed its algorithms and expanded trading in its North America own dark pool, called DBA, Bausano says. In a world obsessed with speed, stealth and sniffing out the Differential, best platform for a trade at any given millisecond, customers in basis points* are looking for brokers with strong electronic offerings, says 1 Deutsche Bank 1.87 Peter Weiler, executive vice president of global sales at ­New York–based Abel/Noser. “Deutsche Bank and the other 2 Jefferies 0.79 top brokers have invested a tremendous amount in their 3 Liquidnet –0.35 electronic execution, and they early on recognized the need to service clients globally,” Weiler says. “Deutsche Bank has 4 Knight Capital Group –0.67 built a really comprehensive offering.” Since the beginning of 2010, brokers have had to navigate 5 Citigroup –0.88 a marketplace with lower average volume and less volatility than during the crisis, which erased $37 trillion from global equity markets from the peak in October 2007 to the low in Europe March 2009. While a rough, plunging market was good for the biggest brokers, a calmer environment showcased the Differential, ability of specialized firms such as Liquidnet Holdings Inc.,

in basis points* a New York–based operator of dark-pool platforms. It was 1 Credit Suisse 10.23 No. 4 in the global ranking. 2 Citigroup 6.58 3 Deutsche Bank 6.08 ‘The ability to trade stock with 4 UBS 5.22 the least amount of price 5 Goldman Sachs 4.45 impact is first and foremost,’ RyBC’s R an Larson says.

An average of 8.4 billion shares a day changed hands in U.S. Asia markets in 2010, down from 9.8 billion in 2009 and 8.8 billion Differential, the previous year, according to data from Credit Suisse Secu-

in basis points* rities. The Board Options Exchange Volatility Index, 1 Macquarie Group 1.40 a gauge of investor uncertainty, averaged 22.6 in 2010, drop- ping from 31.5 in 2009. Volatility is expected to be even lower 2 CLSA 0.66 this year: The VIX averaged 17 through Feb. 15. “In 2008, asset managers and their clients were getting 3 Goldman Sachs –1.03 crushed and there was so much volatility, which brokers ben- 4 Nomura Holdings –1.27 efited from,” Weiler says. “Two years later, you have a situation where people are trading less, money flows are going out of 5 Daiwa Securities –1.86 equities and everything is moving in lock step in the market.” This year’s best performers found ways to piece together the * Difference between the broker’s actual loss (from the time the br­ oker received the order to the executed stock price) and the median­ result, liquidity investors needed even with trading splintered across or benchmark, from a universe of similar trades. When the differential public exchanges, dark pools and private platforms. “We’re is negative, the broker missed the benchmark. Ranking is for the four looking for brokers that can adapt to market conditions as quarters ended on Sept. 30, 2010. Source: Ancerno ­liquidity becomes fragmented,” says Ryan Larson, head of U.S.

2 bloomberg markets April 2011 equity trading at Toronto-based RBC Global Asset Manage- ment Inc. His firm, which manages about $200 billion, uses about 60 securities firms, including Deutsche Bank, to execute its trades. Larson says it’s crucial for brokers to offer a mix of ‘You can’t be a good electronic and traditional strategies to get the best trades without causing speculators to jump in and exacerbate price institutional broker without the moves. “The ability to trade stock with the least amount of price impact is first and foremost,” he says. old-fashioned smartness of the Larson says smaller brokers that handle fewer orders than guy who watches the market,’ big banks are important in specialized areas such as trading Georgetown professor James Angel says. financial stocks. These companies may give individual orders more attention than a larger firm. “Some banks may not hand-hold my trade in the same way,” he says. He singles out Liquidnet and Investment Technology Group Inc. for cre­ brokers have to master a range of approaches in Asia, says ating what he says are good venues to trade blocks of stocks Stevan Vrcelj, Sydney-based head of global cash equities while reducing the market impact and costs. trading at Macquarie. “An execution is not just something One big change in the post-financial-crisis world: Clients you throw into a machine,” he says. “You need to customize look at whether a firm will be around for the long haul. Before the technology to the nuance of each market, visit clients to Lehman declared bankruptcy in September 2008, many understand what they want to achieve from the execution asset managers didn’t worry about the risk that a big broker- and assess whether the right algo and trading strategies are dealer could fail or not settle trades, says RBC’s Larson, who being used at the appropriate time.” says his firm did consider the risk. These days, everyone has Like Deutsche Bank, Jefferies, No. 2 in North America, has to think about it, he says. revamped its offerings as clients demand more tools. The Only five of the top 10 global brokers remained on the cur- 49-year-old firm, which has relied on human traders to quietly rent list from the previous ranking, which covered the 12 locate counterparties for customers who want to dispatch months ended on June 30, 2009. Right behind Deutsche blocks of shares, built an electronic equities-trading business Bank in Bloomberg’s world ranking is Credit Suisse, Switzer- from scratch in the past few years, says Dan Charney, who land’s second-biggest bank, which moved up from 10th. Mac- heads both electronic trading and U.S. equity sales trading. quarie Group Ltd., Australia’s largest investment bank, was a Brokers now need algorithms, as well as research, derivatives new entry in third place. No. 4 Liquidnet operates a platform and salespeople who can compete globally, he says. “We went on which the average U.S. trade size exceeds 45,000 shares, from a relatively low footprint in the electronic trading busi- compared with just a few hundred shares on most U.S. mar- ness to it being a meaningful part of what we do,” he says. kets. UBS AG, Switzerland’s biggest bank, fo­ llowed at fifth. James Angel, a finance professor at Georgetown Citigroup Inc., Nomura Holdings Inc., Inc. University in Washington, says brokerages have to balance and BNY ConvergEx Group LLC all joined the top 10. people and computers. “You can’t be a good institutional ­Goldman Sachs was ninth. Bank of America Corp., Morgan broker without the old-fashioned smartness of the guy who Stanley, Barclays Plc, JPMorgan Chase & Co. and Investment watches the market,” he says. “You also need the technology Technology Group dropped off the top 10 global list. and you need the understanding of market structure to get For the current ranking, Ancerno changed its methods to really good executions.” account for the difficulty of a trade and assess how much This year is the first that money managers’ trading with value a broker was providing. Ancerno first calculates the ­algorithms will claim the same portion of their orders as difference between the price of a share when the broker human brokers, or “high-touch desks”—35 percent each, gets the order and the average price a client winds up with, New York–based research firm Tabb Group LLC estimated called the implementation shortfall. Then it subtracts that in July. figure, in basis points, from the median result for trades Deutsche Bank began building up its electronic trading two with similar difficulty based on such factors as the stock’s years ago. It focused on algorithms that continually rank and momentum while the broker was executing the trade. (A reassess dark pools so clients and its own staff can trade with basis point is 0.01 percentage point.) The previous ranking the least amount of detection. “We’ve been very nimble and assessed brokers only on the implementation shortfall. aggressive in developing products that help customers im- Credit Suisse, based in Zurich, did well on its home turf, prove their execution quality,” says Bausano, who adds that big coming in at No. 1 in Europe. Citigroup was next, followed customers will no longer work with brokers whose electronic by Deutsche Bank and UBS. Macquarie proved best in Asia, offerings and human traders aren’t—in his word—“superb.” with Hong Kong–based CLSA Asia-Pacific Markets, a unit Marques, 46, who has a doctorate in particle physics from of Paris-based Credit Agricole SA, in second place. Since the University of California, Irvine, joined in January 2010. securities regulations differ sharply across the continent, Today, he oversees 45 people around the world from his

April 2011 bloomberg markets 3 New York office—half of whom arrived since mid-2009. On a minimizing information leakage while maximizing liquid- January day, Marques’s team is analyzing statistical differ- ity.” As markets splinter and rivals rebound, Marques’s com- ences in how trading occurs across more than 50 venues in puters will have to work even harder. the U.S. and which types of firms are likely to be in those ­markets. They’ve adopted some tactics of high-frequency nina mehta and nikolaj gammeltoft cover u.s. stocks at bloomberg news in new york. [email protected], [email protected]. traders. If an algorithm discovers that the relationship be- With assistance from CHRISTINE HARPER, Whitney Kisling and laurie tween a stock price and a basket of shares is veering from its Meisler in New York and Aaron Kirchfeld in Frankfurt. historical level, the program may alter how it trades or it may not transact at all. “We monitor every trade in real time,” To write a letter to the editor, send an e-mail to [email protected] Marques says. “We’re choosing when not to trade, and we’re or type MAG .

How We Crunched the Numbers

To rank stockbrokers, Bloomberg least $25 billion of stock trades for clients relative to a benchmark. First, was moving for or against the trader. Markets worked with New York– Ancerno clients during the time Ancerno calculated the difference be- The two-step comparison was de- based Ancerno Ltd., which gathers frame. For North America, where tween the price of a stock at the time signed to take into account the diffi- more than $7.5 trillion in trades a year Ancerno clients execute more than the broker received an order and the culty of the trade. Brokers were ranked from about 500 money managers. All half of their trades, we used the same price at which the broker executed the by the average difference between the of the trades were reported during the $25 billion minimum. We used a cut- trade. Then Ancerno compared this figures that resulted from the first and four quarters that started on Oct. 1, off of $6 billion of stock trades in figure with the median result from a second steps. Scores in the ranking 2009, and ended on Sept. 30, 2010. Europe and $5 billion in Asia to ensure universe of trades that were similar in lists are given in basis points, or 0.01 In the world ranking, only brokers that we had a sample size of about 20 terms of the specific stock, the size of percentage point. that trade in more than one region brokers. the order as a percentage of average LAURIE MEISLER were included. We limited that rank- The best-brokers ranking mea- daily volume, whether the trade was a Bloomberg Rankings ing to brokerages that handled at sures the prices that firms got for buy or a sell and whether the market [email protected]

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