Loat himself remains based in Asia because of his love for the region where he grew up. FinanceAsia found him in a loquacious mood despite the fact that he had only had two hours sleep and had roused himself at 4am to continue training for Hong Kong's Maclehose Trail - an 80km walk across the peaks of the New Territories that is said to be the equivalent of climbing Everest.
Q: Will e-platforms really revolutionise the markets?
A: Yes, I believe so, because they will completely change the way that securities are currently traded. The key lies in understanding what happens now when a client places an order and how automation might ease the process. At the moment, a trader passes price quotes to the sales desk, who then transmits them to the client and back again. There is an indication of interest, offer and acceptance. Much of the process is still manual and conducted by phone.
But when you think of how many tickets a bank like us generates, it's impossible for any one person or team of people to think properly about each and every one. It's far more efficient to let a machine process the straightforward orders and let the human beings concentrate on the rest. One of the most important lessons I've been able to apply in my current role was learnt watching two currency option traders at work about a decade ago when I was running an equity derivatives unit. There were only two of them, but they were writing about 180 options a day with about 10 to 12 strikes each. They were able to process this number of tickets because they were latching onto the unusual and disregarding the standard. Each evening, they would get a couple of juniors to run through the daily stats and pull out, for example, just those strikes which were coming up to maturity and deal with them alone the next day.
To me it's logical that trading will move in this direction. In future we will be trading by exception. I don't think that many of my colleagues would necessarily agree with me yet, but they soon will. A good analogy is to think of the way that a power station operates, where technical staff sit monitoring banks of computers and making sure that generation continues to tick over smoothly.
Q: That doesn't sound like a particularly fulfilling job, nor one that requires many people
A: Obviously there will be some slimming down, but what I'm essentially saying is that you still need traders to monitor the process. What it will require is a different way of thinking. More imagination, great ideas, new ways of bonding yourself to the client and making sure that it's your system they want to click on to.
Getting a machine to do all the grunt work frees the salesperson to be able to cover a lot more clients and in a more effective and focused way. At the end of the day it's all about how you leverage your salesforce and give them the tools they need to present a better face to the client. Presently, one salesperson probably covers about 11 clients. E-platforms should enable that figure to grow. With spreads coming down and prices flattening, it's all going to be about getting that ratio up.
Q: So the end game will all be down to quality of service?
A: Yes. It's like flying a plane. All planes should hopefully get you from A to B, but it's quality of service that generally sets one carrier apart from another. I'll give you an example. In the very near future, salespeople will not only be able to electronically pull up all a client's details and recent trades, but also make instant cross comparisons with other clients. Salesperson A could ring up German insurance company A, for example, and inform them that another insurance company with a similar psychological profile has just started purchasing French Franc bonds and perhaps they might like to consider the same.
Q: How has an e-strategy been developed at Deutsche?
A: Basically there is an internal and external strategy. Internally, we are on the defensive and our main objective is to reduce costs and optimise processes. Externally, we are on the offensive and want to increase our customer base, offer new products and extend cross-selling.
At the heart of the strategy, there are four major prongs which could tie in with any product range we offer across the bank. Firstly, we are in the business of creating virtual trading sites across GCI, (Global - Corporates and Institutions), which spans our equities, global markets and investment banking divisions. Secondly, we try to disintermediate costs. Thirdly, we aim to completely automate the back office and fourthly, there is what we call white labelling. This is where an independent company might distribute products for us. In the US, for example, a company called Pedestal electronically distributes all our mortgages for us.
Initially we decided to make our e-strategy subservient to each product head, but it didn't work at all. There wasn't enough cohesion across the bank and the product heads didn't pay the idea enough time. Now we have what is known as a bang-on-equal approach. I have the enviable job of banging heads together. Most of the work is still done by the product heads as they know their own businesses better than I do, but I make sure that everyone is working towards the same goal. You might find, for example, that when someone has been working in debt capital markets for a long time, they become a bit defensive about upsetting the status quo. I try to make sure things keep moving forward.
Q: And how far have you got?
A: It's probably easier to explain by going back to the beginning and describing Tradegate where it all starts. As it's name suggests, it is the gateway from primary syndication into secondary trading. The moment the order book flips over into the primary and secondary trading book, it's available on the system. In Europe, Tradegate generates about 3,700 prices every second. One of the little touches I like, is the big red panic button at the top of the screen that instantly doubles the bid/offer spread when hit during a bout of volatility.
The system was first launched in the middle of last year, but only actively used from the end of the year. This November, it gets rolled out in Japan and we hope to have it up and running in Asia by next February at the latest. At this point, it will pump price information straight into Asiabondportal and once operational, BondsInAsia as well. By June next year, we hope to see all liquid products being e-traded out of New York, London, Frankfurt, Tokyo and Singapore.
All this price information is then transmitted to either our own proprietary trading platform Autobahn, or any of the number of co-mingled sites we have invested in. Autobahn operates over the Bloomberg network and in Europe where we dominate, we now control about 10% of the overall secondary market, printing roughly 160,000 to 170,000 tickets a year.
Our acceptance rate for electronic orders is 98%. In processing them, we have pre-programmed limits and the computer only throws out those orders which don't fit within them. So what happens when a client inputs an order, is that the computer will first check whether that customer has a settlement line and authority to trade. Then it checks the current price broadcast for the security in question. If the client's order fits within the tolerance band of the broadcast in terms of both size and duration, then it passes through. If it doesn't pass, then it gets sent to a trader to deal with.
Q: Does this mean that most of your trading is now automated?
A: In Europe, the figure's about 52% in terms of volume and about 35% in terms of notional amount. In the US, where e-trading is more established, the figures are much higher and stand at about 80% of all tickets and 50% of notional amount. In the US, we are also a partner in TradeWeb, which accounts for about 60% to 70% of our e-trading business, with Autobahan accounting for the remainder.
To give you some idea of how far we've come and how quickly, it's important to put these figures in context. Three and a half years ago, we were only just beginning to think how the internet might change the way we operate. Just over a year ago, only about 20% to 25% of our trading was automated. Now we're consistently ranked number 1 or 2 on TradeWeb and have recently been invited to become an equity partner by the six US banks that set it up.
Q: What is actually traded on the sytem?
A: TradeWeb currently deals in US Treasuries and is being expanded to cover European government bonds, while MarketAxess, also just about to be launched in Europe, will cover liquid credits. Both are multidealer platforms where institutional investors can trade with dealers but not with each other. There are also interdealer broking systems where dealers electronically and anonymously trade with each other such as BrokerTec, which we are a member of.
Q: And in Europe, is volume up too?
A: This is the easiest region for me to give you growth figures since we have a monopoly position, although this is about to change with the launch of TradeWeb and MarketAxess. Year-on-year, our ticket volume is up roughly 74%. But the most interesting statistic comes from comparing growth levels of those clients using Autobahn and those who don't. For the first six months of this year vs the first six months of last year, volume was up 74% from those clients on the system and just 4% from those clients who're not.
Q: But isn't possible that users can bypass the system altogether and go to another bank for a cheaper quote once they see yours?
A: Yes, and they do. Just as a test I asked for a collapse in our bid/offer spreads in July. It was a quiet month and I wanted to see what would happen. Ticket volume doubled.
Q: How quickly would you say fund managers are embracing e-trading?
A: I think it's a bit of a truism to say that the big guys are slower to take up new technology, because they are used to their own way of doing things. However, once they do, they tend to say "Wow this revolutionises my life", and then there's no stopping them. In Germany, about 80% of our biggest customers use Autobahn. Overall we have about 680 clients in Europe using the system. Considering there are in total about 900 to 1,000 European accounts which trade more than once a month, this is quite an impressive feat. I also recently saw figures suggesting that about 40% of fund managers worldwide now execute trades electronically.
But even more interesting is to look at the growth we've achieved from cross-selling products, which after all is one of the end aims of this whole process. With clients using Autobahn, we managed to achieve growth rates of 20% to 30%, but with clients not on the system, we were actually down 11%.
Q: Any other benefits?
A: The other major saving comes from dramatically reducing the fail rate, which takes up so much of the sales teams' time at the moment. If, for instance, a fund manager puts in a buy order for $50 million, he or she might have a whole number of funds that the order actually needs to be allocated too. Come late afternoon, the call to the sales desk will come in, the first ticket will have to be cancelled and up to a dozen new tickets issued. Trying to reconcile all the allocations between the 12 is more complicated and potential for errors much greater.
Q: What do you think the overall cost savings will be?
A: I strongly believe that the combination of the fail rate going down and volume increasingly should result in a significant drop in cost per ticket. Perhaps by as much as 70% over the medium term.
Q: What's been the most difficult challenge?
A: The initial part of the process is mechanically the most difficult. The outside world sees a shiny new portal, but internally wiring a whole lot of archaic systems together takes time. Intellectually it's not that demanding. Stage two which sees us having to really differentiate ourselves with our great sales ideas is going to be far more challenging.
Q: What's your view on Asia's potential? You do after all have two major investments here.
A: The quick and dirty answer is that we would have preferred to be involved in only one Asian bond trading platform. But the fact is that Asiabondportal was here first and when HSBC and Citigroup came up with BondsInAsia, we simply couldn't afford not to join it too. It cuts to the chase about why so many banks are involved in so many competing systems. No-one wants to miss being on the winning side.
In Asia, of all the international banks, HSBC and Citigroup pose the biggest threat to us in the domestic markets. We just couldn't let them develop a system without us and likewise, they couldn't let us float loose and possibly tie-up with some of the bigger domestic banks. It's as simple as that.
Asiabondportal's trading platform has just gone live and we've already printed some tickets. However, we're not fully up-to-speed yet because we need to create more bandwidth between our trading rooms in Hong Kong and Singapore. When we first started trading, we found that other things were starting to get pushed out.
Asia is less liquid and trading volumes are smaller, so there aren't the economies of scale to be had yet. You also have to be careful not to move too far ahead of your clients, or lag behind your competitors. It's a fine balance. The region is going to be slower to develop, but it is still critically important to us and we have some pretty senior bankers based here, including me. I do think though, that the e-trading in the local markets may develop faster than cross-border trading as it is such a major focus for countries at the moment.
