Moscow-based agency-only broker-dealer Otkritie Capital is breaking into the U.S. marketplace, offering U.S. institutional clients and high-frequency traders access into the equities markets in Russia and other former Soviet countries.
While the firm is relatively new to North America, and has been around for more than 15 years, its roots began in the U.S. The firm was founded by Vadim Belyaev, who was working in the U.S. and observed how brokerage Charles Schwab operated in the early 1990s. He exported the U.S retail brokerage model he’d seen back to Moscow and established Otkritie in 1995. The goal was to offer the Russian people direct investment opportunities in their own local firms at low cost.
According to the Russian Trading System, a total of U.S. $5.7 billion worth of equities changed hands as of the January 24 market close. That equals a market capitalization of U.S. $806 billion.
"Our initial clients were retail, and Belyaev liked the model of direct market access and the execution model in the U.S. and brought it to Russia," said Luis Saenz, chief executive officer at Otkritie in New York. "At that time, we were based in Moscow and kept a retail consumer focus."
But Otkritie wasn’t satisfied with servicing only retail clients. In 2007 the firm became an investment bank and turned its attention to getting U.S and European hedge fund and other institutional trading flow into Russian equities and growing the firm’s commissions. Saenz said once the firm solidified itself as a retail-focused brokerage providing access to Russia, Ukraine and Kazakhstan, it wanted to hunt for big game institutional investors. And that was something the six sales traders based in Moscow needed help with.
Enter Saenz, a 12-year financial market vet who has spent a part of his career focused on the Russian marketplace. Saenz got his start in the business as a relationship manager for the investment bank business at Deutsche Bank in New York, focusing on South American clients. He also worked at Dresdner Kleinwort Wasserstein.
He joined Otkritie in 2009 and was charged with building out the firm’s London office. The office grew from six people in 2009 to 40 in 2011.
"It was a small office, really like a closet," Saenz said. With only a small staff, including two sales traders and four in research sales, the build-out began. Out of that office, he built out the firm’s international trading platform. "Our goal from there was to provide global institutional clients with access to the Russian and CIS – Commonwealth of Independent States markets."
While in London, Saenz and his team began trading with institutional clients across the U.S. and Europe, such as hedge funds, mutual funds and a handful of high-frequency trading firms. Otkritie, with its niche focus on the emerging CIS countries, was able to exploit its local strength and execute trades while its larger competitors, he said, chose to focus on other markets and products. The firm also commits capital on behalf of its clients.
Trading in Russia and the former Soviet states isn’t as straight forward as it is in the U.S. This is how it works: An institutional client wants to get exposure to a Russian company, so it places an order with Otkritie, who sells it an American Depository Receipt-ADR-backed by the Russian firm’s stock.
The advantage of owning an ADR is that U.S. investors are able to buy the securities of a foreign company without the accompanying risks or inconveniences of cross-border and cross-currency transactions. ADRs are issued by a domestic depositary bank while the underlying shares are deposited in a foreign custodian bank, usually by a broker-like Otkritie-who has purchased the shares in the open market local to the foreign company.
That’s where Patrick D’Angelo, Otkritie’s New York-based director of equity sales trading, comes into play. As the firm’s sole sales trader, he is responsible for executing the firm’s business in the U.S. D’Angelo, a 20-year veteran, joined the firm last December to establish a U.S. trading desk and sales effort for North America. He comes from hedge fund Hyerdale Capital, where he was a portfolio manager and managing partner for the last five years. Prior to that, he was head of equity trading at Dresdner Kleinwort Wasserstein and did a stint at Credit Suisse, managing its Asian equity trading desk.
"Here in New York, we’re trading Russian ADRs and we’re also doing local execution in the Ukraine and Kazakhstan," D’Angelo said.
Assisting D’Angelo at the moment is J.P. Natkin, director of equity sales. Natkin, also a 20-year veteran, comes from French bank Credit Agricole, where he was head of emerging market sales and head of client services in New York.
"I want to keep the New York office lean and mean," D’Angelo said of his fledgling operation. "We want to get the clients first, and then expand." He hopes that by the summer he can bulk up his desk and hire two more sales traders.
But selling the buyside on trading Russian or CIS equities could prove a hard sell. One buysider said that his firm steers clear of the region due to geopolitical risk. The trader told Traders Magazine that back during the financial crisis in 2008, the Russian equities markets simply shut down for a few days. "Any market where it can just shut down for a few days is not a good one for investors," the buysider said.
Another buysider said his firm is currently evaluating investing in Russian equities, the lack of uniformity and clarity regarding local trade settlement processes has them concerned.
But for those willing to trade there, this is how the desk’s trading process works. When D’Angelo gets an order, he sends it to Otkritie’s Moscow trading desk and then they execute it locally. The Moscow trading desk’s six traders employ both high-touch and low-touch trading strategies, depending on the stock. Sixty percent of Otkritie’s trades are executed high touch, while the balance is executed electronically through the firm’s three algorithms.
"The algorithm is somewhat new to the Russian equities space," chief executive Saenz said. "They just aren’t used that much." However, algo usage has picked up in the last three years, he added.
The bottom line for Otkritie and D’Angelo is to find liquidity for their clients, given the region’s emerging classification. Some countries and names can be spotty.
"Some names trade well and have excellent depth of market while others are very thin," he said. Some trades are executed instantly, though some can take hours or possibly days, he added.
D’Angelo also likes to get blocks done when possible. He told Traders Magazine that he can get blocks of stock ranging from 25,000 to 250,000 shares.
Otkritie provides clients with its own in-house research and algorithms for these emerging markets. The firm employs 25 equity and five fixed-income researchers based in Moscow, all focused on providing clients with local market intelligence. Saenz told Traders Magazine Otkritie has developed three "simple" algos for the Russian equities space, but declined to provide more details.
One trader with knowledge of Otkritie and the Russian equities markets gave Otkritie a thumbs up in their expansion. He said the firm was well positioned in the Russian markets given it offers clients DMA and algos.
"They made their business on offering DMA and that is their strength,’ he said. "I think Otkritie will do OK in their push for business."
