Take a page out of the high-frequency traders’ playbook and offer it to institutional clients. That’s the game plan at RBC Capital Markets’ electronic trading group.
Long known for its high-touch trading business, RBC has quietly been building out its electronic trading desk since 2009, looking to earn a piece of the electronic trading revenue pie, said Brad Katsuyama, head of electronic sales and trading at RBC Capital Markets.
"We saw the opportunity to make an investment there," Katsuyama said, referring to when it revamped its electronic trading business last year. "We are building agency algorithms for buy-side clients."
All told, the electronic trading group has hired about 70 professionals in the electronic trading group. Those hires have come across the board in sales, trading and technology.
According to Katsuyama, the interesting part is that building proprietary and agency strategies have a lot of similarities: There is the need to understand market microstructure, order placement, and ultimately, how to incorporate models and analytics into execution decisions.
"So understanding this concept, when we decided to enhance our client facing tools, we decided to recruit talent from the high-frequency trading industry in order to help our clients compete with them," Katsuyama said. Roughly a dozen of the hires came from high-frequency trading backgrounds, he added.
By ratcheting up its electronic trading offerings, RBC wanted to allow clients another way to pay for its research, and ultimately, grow its commission levels with clients.
"By not having a full-service electronic offering, we were only competing for a fraction of the client commission pool and our goal has been to gain share in all facets of the business," Katsuyama said. "The is evidenced by our concurrent build-outs in U.S. program trading, ETFs, options and convertibles."
A recent 2010 Greenwich survey indicated that 36 percent of client business was done electronically–up 1 percent from the 2009 survey. Previously, within the firm’s global equities group, its secondary trading revenues were primarily driven by its high-touch business, with only a small amount coming from electronic trading.
Also, increasing its presence electronically would help RBC answer client questions on high-frequency trading that it was receiving–effectively killing two birds with one stone. Katsuyama said its clients were expressing frustration at not being able to access as much liquidity as they wanted and not knowing where to find it–the old fragmentation conundrum. And high-frequency trading techniques were often the answer.
Most market estimates say high-frequency traders constitute approximately 60 percent of market trading volume. Yet they only represent two percent of all market participants, according to Aite Group.
"Such a minute percentage of participants know the intricacies of market microstructure and high-frequency trading strategies," Katsuyama said. This is what made high-frequency trading pros so attractive to hire, as their knowledge of the market would be a huge benefit in building a client-facing business.
So RBC has hired high-frequency trading industry professionals, including infrastructure specialists, product developers and software engineers. They understand the intricacies of high-speed trading and can help clients understand the business.
"Knowledge is not publicly available on HFT, such as how to build strategies, what technology they are deploying, and what order types and liquidity signals they are using, so hiring from that industry seemed natural," Katsuyama said.
RBC has also expanded its electronic sales effort beyond New York, Toronto, and London. It added Brian Pears in Los Angeles and Bill Devin in Boston.
Pears, a 19-year veteran who spent most of his career on the buyside, was previously with JonesTrading in Westlake Village, Calif., where he headed electronic trading initiatives at the firm. Devin is a 20-year sell side veteran who was most recently at ESP LLC, responsible for trading and clearing solutions. Both Pears and Devin report to Brian Suth, who heads U.S. electronic sales.
In addition to Pears and Devin, RBC also added 16-year veteran Rich Dalgetty from UBS. Dalgetty was formerly responsible for UBS’ PIN ATS and now joins RBC’s electronic sales trading team, reporting to Anthony Victor, head of U.S. Electronic Sales Trading.
Across the pond, Nick Fothergill will be joining as head of the European equities business. Fothergill, a 17-year pro who spent much of his career on the sellside, was most recently with Nomura, where he headed sales and trading for the firm’s sector specialist sales and industry groups. Fothergill will report to Greg Mills, global head of equity sales.
RBC is still in the market for trading professionals and not necessarily with a high-frequency pedigree, despite already adding 560 people globally in all capital markets.
And the additional hires have translated into results as RBC has already seen a 30 percent increase in electronically driven trading volumes since mid-May. It declined to comment on revenues.
"We’re just in the first inning here and expect volume to increase significantly," Katsuyama said. "A year from now, we’ll be getting even deeper into the electronic trading business–expanding our product line further and widening the revenue stream."
RBC is in the process of rolling out its next generation algorithms but declined to provide further details. RBC also offers clients research, transaction cost analysis tools, and smart order routing. RBC currently builds agency algorithms for its buyside clients targeting single name, institutional sized orders.
