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Vision for the Future
I think the marketplace will get more interrelated across multiple product spaces. So, whether it is fixed income or equity products, as those relationships get tighter and tighter, volatility views between different products will be analyzed more and more. I see that being more developed. And I see the equity market being traded more and more electronically. However, the need for capital will continue for block business.
Fun Facts
Tell us something interesting that few people know about your professional or personal background.
I spent a week at Met Baseball Fantasy Camp, which was a blast. It's a week down in Florida playing with some ex-Mets and 50 other campers like myself. We had scrimmages and games, playoff games and kept stats. It was a lot of fun. Unfortunately, we showed our age - thankfully, there was a whirlpool at the end of it.
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Putnam Investments
1 Post Office Square
Boston, MA 02109
Assets under management:
$180 billion.
Fund(s) for which you trade:
We trade for multiple mandates across all of Putnam's Global Equity Funds and Institutional Accounts.
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Types of products traded:
We trade in all markets, equities, convertibles and derivatives. In fixed income, we are basically across the board - Treasuries, mortgage backs, municipals. We also have a global asset allocation.
Daily volume in equities:
$850 million - $600 million domestic; $250 million international.
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Structure of trading department:
We all are based in Boston. We have a large-cap trading desk. We have four international traders - two trade Europe, two trade Asia. We have seven domestic equities traders, two program traders who also trade derivatives and three support staff.
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Previous Positions:
I worked at Morgan Stanley both in the New York office and in the London office as an equity derivatives trader. I came to Putnam to start up the program trading and derivatives operation, and that has branched out into head of global equity trading.
Education:
My undergraduate degree is in business from Albany State (New York). Then I attended NYU business school, where I earned my M.B.A.
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TECHNOLOGY
Technology budget for trading:
We don't have a specific technology budget. It's upon request. I meet with the CTO and we discuss what the needs are - some of them get met and some of them don't make the cut.
Technology used to trade equities:
We currently use a proprietary order management system, but will be migrating to Latent Zero's order management system in the second half of 2006. We use broker-based technology for pre-trade analysis as well as Barra for evaluating risk. We employ ITG's pre- and post-trade reporting as well as Abel Noser's ex-post reports to evaluate transaction costs.
Chief Information Officer:
Philippe Bibi
How do you work with your CIO when it comes to getting new technology on the trading desk?
It's collaborative, as far as which vendors we are involved in selecting for rollouts. For instance, the order management system that I referred to before, we were collaborative as far as deciding which firm to use. And then, as we go forward, as far as designing specifications, we work together to ensure that they meet our guidelines.
If it's something of a smaller nature (e.g., enhancements), we detail the specifications and prioritize accordingly, without CTO intervention. If, however, the project is of a larger scale, we collaborate with the CTO to prioritize based upon overall firmwide demand.
LOOKING AHEAD
What trends/regulations/issues do you think will transform your role as a trader?
The biggest trend is for buy-side traders to get smarter and smarter about how to execute and what they need to use. With all these algorithms and different strategies, the marketplace has gotten more complex. It's gotten more fragmented, and controlling execution in a way that allows us to minimize our market impact becomes a greater and greater challenge. I continue to see that moving forward. I also continue to see the skill sets necessary for traders to be more quantitative than ever.
What do you hope technology can change to make your role easier?
What will happen more and more is that buy-side traders will directly execute, so that link will become more and more important. I think linking order execution to commission systems is something that will also make people's jobs a little easier.
INTERNATIONAL TRADING
In which international markets do you trade?
We trade in all developed and emerging markets across all regions.
Do you have separate traders for international trading?
We have separate traders for international trading, and they work off hours.
Who do you use as a custodian bank?
We have multiple subcustodians. For our U.S. funds we use State Street and Citigroup, and internationally we use Brown Brothers Harriman and Chase.
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PORTFOLIO MANAGEMENT
Describe your relationship with your portfolio managers? Has it changed recently? Do you expect it to change?
Yes it has. In the fourth quarter of last year, we aligned ourselves more closely to our portfolio management teams logistically, so that we now have a domestic large-cap trading desk sitting next to the large-cap portfolio managers and analysts, and a small-cap trading desk located near our small-cap portfolio managers, and similarly with international. So that has gotten more aligned and has increased dialogue, making the investment process more collaborative.
How do you work with your portfolio managers?
We have multiple portfolio managers across varying style groups - inclusive of value, growth and core - and across the capitalization spectrum. We work closely with PMs in designing execution strategies inclusive of single-stock executions, program trades, derivatives trades and pair trades.
ALGORITHMS
Types of algorithms used to trade:
Our benchmark is implementation shortfall or arrival price, and we have been involved in the design of algorithms that strive to meet that target. There are a lot of options and providers in the marketplace, and we have focused our energies on limiting our provider network and customizing strategies that we believe best represent our clients' interests.
Which algorithms do you use most often?
It's such a dynamic space right now. There are continued new rollouts and, at times, we are using combinations of more than one strategy with a particular order. So it's really an ongoing process.
Do you use algorithms for equities only?
Yes.
Which brokers' algorithms do you use?
N/A
Do you build your own algorithms?
No. We have helped design and customize algorithms to meet our objectives through a core group of brokerage firms. [Block declines to name the brokers that Putnam uses.]
How do you rate your brokers and determine which broker will get your order flow?
We certainly evaluate our brokers, but we do not draw a linear relationship between execution and order flow. There are too many other factors that can go into the execution costs - particularly what stocks we are buying and selling, how the trader is executing, and lastly, how the broker is receiving instruction. So we do look at transaction costs by brokers and see if there are any outliers, and if there is an issue there, we will adjust business levels. But it is not the driving force behind order flow.
To decide order flow, a lot of it is through sourcing natural liquidity. It's through capital commitment and through the market intelligence. Those are the big factors that let us designate order flow and access to position traders, so that the trader at the sell-side firm has a good lead on his stocks.
For more on Putnam's technology efforts, check out Senior Managing Director and CTO Philippe Bibi's profile in Wall Street & Technology's Gold Book 2006, which profiles leading technology executives.
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Interview by Leslie Kramer, Contributing Writer
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