A lot has happened since Mike Bellaro appeared on the cover of Traders in July 1998. Back then he worked crazy hours at asset management firm Scudder, Stevens & Clark, and not only was electronic trading taking off, so was international trading. At the time, Scudder was the biggest asset manager in the world and Bellaro was leading the charge. That’s one reason they were eventually scooped up by Deutsche Bank in 2002 and Bellaro was promoted inside the German banking giant.
Now Bellaro is global head of equity and listed derivative trading for Deutsche Asset & Wealth Management (DeAWM). This division boasts an estimated 163 billion euro ($185 billion US) in AUM out of DeAWM’s total AUM of $1.26 trillion making it the largest buyside firm in Europe. “From a pure equity perspective, in the past year we’ve had roughly about 159 billion worth of trading buy-in, and close to 500,000 transactions last year for assets,” he told Traders.
Bellaro now manages 18 traders around the globe: 11 plus himself in Frankfurt, four in the Americas and the remaining three who trade ETPs. Before that, he ran the Deutsche asset-trading desk in the U.S. When he moved to Frankfurt four years ago, his mandate was clear: build a best-in-class trading platform starting in Frankfurt and then in the Americas. When Traders spoke to him this spring, he had just put the finishing touches on rebuilding the U.S. trading operations. It was quite a change from what he found when he came to Frankfurt in 2010.
Mission: Build The Best Trading Platform
When Bellaro arrived in Frankfurt, he found a buyside landscape that was three to five years behind their buyside compatriots in New York. He conducted what he called a “complete holistic overview” of DeAWM trading platform and procedures, to try to understand how it worked, what didn’t work, and what he and his team needed to tackle. The first thing that Bellaro realized was the absence of any electronic trading infrastructure.
“When I first arrived, less than one percent of our trades were actually done electronically,” he said, referring to broker algorithms, program trading and smart order routing. Those are trades that are executed via custom-designed broker algorithms with no human intervention. “I wanted to optimize efficiency and route orders through SORs as much as possible. I put in a smart order routing module, which based upon certain criteria [moved] trades away from the traders,” he said.
After installing the smart order router, Bellaro began an aggressive campaign to teach his traders how to embrace electronic trading. “If you look at where we are today, 85 percent of my trades are now done in an electronic bucket. That includes programs, smart order routing and broker algorithm trades,” he said. “It’s a complete transformation in our approach to trading.”
The second part of the plan was identifying historical tasks that were no longer related to trading that had been assigned to the trading desks. Bellaro recalled that he presented his supervisors with two options: Either hire more traders or take the bold step and build a middle office for the trading desks. Management agreed to a middle office that would allow Bellaro to take these non-trading-related tasks and move them into this new operation. This freed to the traders to do what they were hired to do: Trade on behalf of the portfolio managers.
The Future of Trading
These initial steps allowed Bellaro to focus on the future of trading, a topic that clearly inspires this industry veteran. Along with new technology and a renewed focus on block trading — more on that later — he told Traders that he needed to hire traders who have what he calls “the right DNA.”
Looking back, 2013 was a big year for new hires inside DeAWM. The firm nabbed Vincenzo Vedda from Morgan Stanley to be deputy global head of equity trading and Matt Montana was hired away from Bank of America Merrill Lynch as head of equity trading for the Americas. (Juan Landazabal was named global head of fixed income trading after he left Fidelity International.) Bellaro called Vedda “one of the world’s best program traders” and added, “If you think about programs last year represented 40 percent of my notional, programs are mission critical to everything that I’m doing. Having the right trader with that DNA is mission critical.” As for Montana, Bellaro cited his 20-year-plus as an international proprietary trader from Merrill Lynch. He has the “right DNA as far as understanding markets and drivers and actually helping our fund managers make better decisions around implementation.”
The meat and potatoes of Bellaro’s project was to build a proper buyside trading infrastructure. “I’ve always looked at this that for the buyside to be successful, we really have to build a sellside infrastructure in the buyside trading operation. So it’s really building the sellside within the buyside,” he said. This meant overhauling of the trading desks in the Frankfurt headquarters and rebuilding the U.S. trading operation.
Another portion of Bellaro’s plan was to implement product group trading. This means he assigned traders to cover a specific portfolio management team in order to improve efficiency. This came with one focus: to build the sales trading culture within the buyside. To accomplish this, he said “you have to understand what your clients or key stakeholders are actually thinking about. You have to [ask] what is the personal investment process? What are they thinking from a portfolio strategy perspective? What names are they thinking of adding, liquidating? What themes are on their mind, et cetera?
To accomplish this, his buyside traders attend weekly meetings with fund managers to pick their brains and fulfill their needs. The traders are expected to come with more than ideas; they are required to provide liquidity events, market intelligence and more for the portfolio desk. “We bring flow that’s correlated to their whole investment bill process,” said Bellaro.
Bellaro quotes DeAWM global equities head Henning Gebhardt who said that “the PMs decide what to buy, traders decide what to implement.” But for this to work the traders and PMs must share the same brain, added Bellaro. “We’re all thinking, acting, and aligning towards the same goal,” he said.
The buy-in from the firm’s global traders, portfolio managers, and senior management was key to Bellaro’s task, even when disruptive new technology and methods were introduced a few short years after the global meltdown of 2008. “Without question, we have been blessed with full support of senior management,” he said. For the PMs, “we’ve helped them understand the complexity [of trading]. The equity markets have become extremely complicated over the last 10 years and we live in a world where strategic liquidity has been a major topic for all of us.”
Portware Enters the Picture
This spring, DeAWM implemented technology solutions from Portware from an equity-listed derivative perspective, which Bellaro called “a major investment.” With the new Portware solution, he said that DeAWM will have “an execution management system that has never existed before.” It all starts with the infrastructure and the solutions that the traders touch. “To stay a step ahead of the competition, you really need the best possible technology to help you drive towards those goals.”
With that in mind, DeAWM built an equity capital market desk a year-and-a-half ago in order to maximize the firm’s allocations on the IPOs that were taking place. It is now using the equity capital markets division within the investment bank as a source of a potential liquidity. “We are now, for first time in our lives, actually initiating transactions,” said Bellaro.
As for Portware, the buyside overhaul of DeAWM was in the Top 10 financial IT projects in the fintech firm’s history — and it’s still on-going. Codenamed “GT2” for the Porsche GT2 — Alfred Eskandar, president of Portware, calls himself a “car guy” — the DeAWM project meant plenty of late nights and working on weekends for the Portware team. (Eskandar recalled other regionally appropriate projects such as Aston Martin Vanquish and Shelby Mustang. No IT project has been named after the Yugo, he admitted to Traders.)
Eskandar credits Bellaro’s vision for the enthusiasm of the project among the traders and portfolio managers and the lack of pushback. “That’s sort of atypical. I strike that up to Mike’s vision and real belief in this. He really commands the respect of his desk,” said Eskandar. “He sold it well to them and got them excited about advanced technologies and said it’s not something to be afraid of. It’s something to embrace.”
The FX trading desks first benefitted from Portware technology but Bellaro wanted the same for the equity desks. Along with the customization of the screens based on the trader’s preference, there was a reduction of procedures the trader had to perform and a merging of different intelligence within the enterprise. “It’s not just taking manual steps and converting them into clicks. It’s taking internal and external data, best practices, knowledge of the complex market structure, and then creating a custom electronic workflow that takes advantage of that. That’s what Mike and his team have been driving,” said Eskandar.
Looking back, DeAWM has been on a four-year mission to become one of the leaders of electronic trading in Europe. Bellaro said that the asset manager’s e-trading numbers are on par “with any firm anywhere” but at the same time his team been on what he calls a Quest For Alpha Rate, which is a focus on strategic liquidity. Further, “we’ve been a two-year mission to bring back block trading. To put that into perspective, when I look at my electronic trading performance, it’s upward now on 1- to 5-basis points. My block trading is where all my alpha comes from,” he said.
And it’s growing. Bellarro said that he has executed more block trades in 2014 than he has in the last five years combined. The fourth quarter of 2014, for example, was his best quarter from a block trading perspective. “When I compare 2014 plus 2013 trade performance looking at post trade analytics, I’ve seen a massive improvement in performance all led by the initiative around block trading,” he said.
Why the push for block trading? Bellaro believes that a future regulatory crackdown on dark pools will push the need for block trades and he wants that head start.
With the rise of smarter technology, big data and new regulations under consideration, Bellaro sees a shift in the buysde’s role. Gone are the days of asset managers being beholden to the broker-dealers for research, liquidity and execution. This a “pinnacle time for buyside,” according to Bellaro. “I think that buyside trading probably has a more holistic view of what’s really happening in the marketplace than some of our traditional sell-side competitors,” he said.
“We’re at a moment in time where you’re going to start to see the empowerment of buy-side trade. The equity landscape completely changes on the back of some of the regulation coming in. The whole topic around the use of dealing commission, how you pay for research, et cetera. From my perspective, there’s going to be a significant change to the execution component,” he told Traders.
Target: Goldman Sachs?
DeAWM’s buyside transformation comes at an interesting time for parent company Deutsche Bank. The IT project began in the aftermath of the 2008 credit crisis and in the midst of a grinding recession that roiled the global markets. During this period, Germany’s economy held strong, so strong that it had to help out a wobbly European Union when it nearly saw Greece leave the E.U. due to a looming bankruptcy. Around that time, news that major European banks had colluded to rig the Libor rate rocked Europe. In April, Deutsche Bank AG was hit with a record $2.5 billion fine and was forced to fire seven staffers to settle U.S. and U.K. investigations into its Libor rigging role.
Despite these bruising headlines, recent news reports speculate that Deutsche Bank is looking to grow itself into the next Goldman Sachs. Bloomberg reported that the German bank is exiting retail banking to focus in the far more lucrative global fund management and investment banking fields. And they may have buy-in from the government. As Michael Fuchs, the deputy parliamentary leader of Chancellor Angela Merkel’s Christian Democratic Union, told Bloomberg, “Deutsche Bank is Germany’s only global player in banking. If they decide to restructure their business, we should support them.”
Could Bellaro’s buyside overhaul help the parent bank grow into a global powerhouse like Goldman Sachs? He gave Traders a firm “No comment” but Portware’s Eskandar noted that growth and scale were the cornerstones of the asset manager’s buyside transformation. He said that the revamp gives DeAWM the ability “to basically double or triple their assets under management without having to buy any new technology.”
Eskandar added, “It gives them the ability to adhere to any new market regulation or market structure change without having to overhaul their technology, and be able to respond very, very quickly to it.”
To be clear Portware has no idea if Goldman Sachs is in DB’s sites but the ability to grow was paramount. “We’re not aware or we’re certainly not privy to the specifics that they want to do, but what we’ve been engaged and contracted for is give me the capability to do whatever I want when I want it,” said Eskandar.
That said, Bellaro passionately believes that the technology has a place in the future of DeAWM and will help drive his division towards excellence. “It’s having the best technology. It’s also looking at some of the questions and concerns around market information. You have information coming in through Bloomberg IMs, messages, e-mails, phone calls, indications of interest, and having a big data solution that can actually take all of that and crunch that and give you the information correlated to things that you actually care about and want to know, I think clearly that’s going to be the future.”
He added, “If I can find that sliver of information that can help me make a better trade decision as quickly as possible, it’s going to give me a competitive edge.”
