Traders: Please tell us about your role at Bank of Montreal.
Sean MacKenzie: I oversee electronic and program trading here in the U.S. for the equity products division. Our equity products division is primarily focused on the U.S. and Canada. We’ve got some folks in Europe, in Zurich, Paris and London, who cover European investors and some accounts in the Far East, but those clients are predominantly trading U.S. and Canadian securities with us. In the U.S. and Canada, we have staff in New York, Boston, Chicago, Houston, San Francisco and across Canada.
Our focus is primarily U.S. and Canadian shares and companies; probably 99 percent of what we trade is U.S. and Canadian stocks, at least within the equity products division.
In terms of our clients, we focus largely on the top 200 institutional investors here in the U.S. and have a similar list of clients in Canada.
Traders: So asset managers, pension funds, hedge funds?
MacKenzie: Yes, the top hedge funds and the Who’s Who of the institutional investment community here in the U.S. and Canada; that’s who our product is targeted at. In terms of high-frequency traders and other broker-dealers, we don’t focus on those segments of the marketplace.
Traders: BMO is an investment bank and not a brokerage, correct?
MacKenzie: We’re a broker-dealer and an investment bank. We’re members of the U.S. and Canadian exchanges.
Traders: Tell me about your platform.
MacKenzie: In terms of breaking through the noise, one of the things that we try and do a little bit differently than some of the other desks is service. People appreciate service, which might be as simple as a phone call in some cases. Low-touch might be low-touch, but it’s not no-touch. Often people do appreciate additional color, additional content, a phone call, service around the electronic trading product.
I also oversee program trading, and as with the high-touch business, there’s been an evolution from program trading, or traditional program trading, to more electronic trading. A lot of our clients were big program trading accounts a few years ago and would send us lists to execute; those clients are still trading lists, but they’re doing it electronically and they’re doing it themselves. And frankly we’re fine with that.
Traders: What’s the name of the platform?
MacKenzie: It’s the BMO electronic trading platform.
Traders: You guys are too modest.
MacKenzie: We try to keep the product simple, in terms of the design of the suite. We looked at what other people were doing, and one of the things we saw was that the algorithms themselves were becoming increasingly complicated to use, to the point where we we’re trying to stage a VWAP order and there’s 20 different parameters. We tried to keep our product very simple in terms of keeping the number of inputs and switches and dials to an absolute minimum to make it very easy to navigate.
Traders: Do you create your custom algorithms?
MacKenzie: Yes, we have our own custom algorithms. One of the things that we’ve done is we’ve partnered with a number of technology providers. We’ve crafted a suite of algorithms that are custom to BMO and use leading third-party technology. This means working with our vendor partners on a continuous basis to tweak how things work and operate.
Traders: You don’t run your own dark pool. Why not?
MacKenzie: No. When we were launching the business, we were thinking about how do we position ourselves, and to be honest, the notion of launching a dark pool didn’t make a lot of sense. By the time that we started to launch our business here in the U.S. it was already 2010, and the market was fairly heavily saturated with dark pools. We felt if we were to launch another dark pool now, you’re talking about the 40th dark pool in the U.S.; how are you going to differentiate it versus all the other ones?
Traders: There have been some hefty fines in the dark pool space. Have any clients asked you to avoid specific dark pools?
MacKenzie: Yes. We’ve had clients ask us to avoid transacting at certain venues. Typically, it’s in response to something in the headlines and/or the result of a fine, and there are some venues that clients have asked us to turn off or not route there. One of the advantages of our platform is because we are execution venue-agnostic, we can easily turn off a venue and that client’s orders are no longer routed to that particular venue.
Traders: What happens when you have a day like the correction/crash of August 24 of last year; does everybody run for calm waters?
MacKenzie: Our business is an agency business, so it’s driven largely by what our clients are doing. In that particular case they were dealing with a lot of issues around the open, and the reality is a lot of clients did sort of step back and if they had the ability, they pulled their orders out and just waited for things to calm down a bit.
Traders: I profiled a hedge fund and on days like that, everyone steps away from their desk and they just play a little ping-pong. They say that the $200 ping-pong table has actually saved them millions.
MacKenzie: Yes; don’t feel compelled to do something that you know you shouldn’t be doing. A lot of our concern in those types of situations is just making sure everything is working properly. Because you’ve got spikes in various forms of message traffic, where we often get most busy is when there are major street-wide system issues, whether it’s because of shocks like that or various other things. There have been a few of those this past year.
Traders: What technology are your buy-side clients asking for?
MacKenzie: Each client is a little different. One of the things we’ve noticed recently is clients are asking for more order-routing audit trail information. We and probably everyone else have been providing things like MIC codes and last-fill information for quite some time. Where you’re getting your fills, the nature of your fills, whether they’re taking liquidity and other markers that indicate how that order got filled in the context of the marketplace.
Traders: Does this fall under best execution?
MacKenzie: Yes, and then obviously our capacity in those fills, too. Most people have been providing that type of information for quite some time. The next evolution in TCA that we’re seeing more and more requests for is information about how and where the order was routed before it was executed. We know where that fill took place, we know the size of that fill, we know whether it took liquidity or was done at the midpoint or was done on the passive side, we know what your capacity was. But now we want to know before the order got to NYSE, where else did it go, and what were the various hops and steps that order took before it finally got filled there?
Traders: Do they want reasons why the execution didn’t take place?
MacKenzie: They want to understand the lifecycle of the order leading up to and including the execution.
Traders: What’s the best thing about your job?
MacKenzie: The best thing by far about my job is interacting with clients — the client interactions and helping our customers achieve what they’re trying to achieve.
