Vision for the Future
In the future the lines will be blurred between international stocks and domestic stocks, especially with the proposed NYSE merger with Euronext and all of the other foreign exchanges that are merging or talking about merging. There will also be more-efficient ways to make those instruments (stocks) fungible. And things such as time zones will become less and less significant.
Fun Facts
Tell us something interesting that few people know about your professional or personal background.
I am an avid bow hunter. For me, that's the release after working a long week on the trading desk.
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American Century
4500 Main Street
Kansas City, MO 64111
Assets under management:
Approximately $100 billion in equities
Fund(s) for which you trade:
I represent the entire complex of American Century's funds.
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Daily volume in equities:
We trade about 14 million shares a day, or about 3 billion shares a year in domestic equities and ADRs. Things like options and futures comprise probably less than 5 percent of what we do.
Types of products traded:
We primarily trade cash equities at our headquarters in Kansas City. To a lesser extent we do some work in ETFs and futures. Our fixed-income business is located at our California location.
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Structure of trading department:
We are structured with a global head of trading, a gentleman by the name of Steve Klein. Mr. Klein joined us from the Kansas City Board of Trade. He oversees both the international desk in New York, as well as the domestic desk in Kansas City. The bulk of our work is done right here in Kansas City. Our international effort is out of New York City. We have a team of four dedicated traders in New York handling order flow. We also have a portfolio management office, where we manage our quantitative equity funds and fixed-income business in Mountain View, Calif.
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I report to Mr. Kline, as does my counterpart in New York.
Previous Positions:
I started my career while in college in the early to mid '80s. I worked in the investment department of Marine Bank as an order-entry clerk entering fixed-income buys and sells. By the time I graduated, I was a commissioned fixed-income salesperson. In October 1986, I started at Robert W. Baird as a market maker and began working at American Century in 1991.
Education:
B.A. in economics from the University of Wisconsin-Milwaukee.
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TECHNOLOGY
Technology used to trade equities:
We use Liquidnet or any of the dark pools that add liquidity, as well as various ECNs and electronic trading platforms. There aren't many that we haven't tried.
Chief Information Officer:
Bob Sauvageau, who came to American Century from Fidelity. [Ed. Note: Sauvageau is retiring. Effective Jan. 1, 2007, Gudrunn Neumann will be the new CIO. Neumann currently is a senior vice president in IT responsible for infrastructure service areas and applications development for investment management.]
How do you work with your CIO when it comes to getting new technology on the trading desk?
We believe that technology is probably the best way to make trading more efficient for our shareholders. So [Bob] and other senior executives at American Century have supported our efforts to trade electronically. He basically gives us the autonomy to focus on best execution first, by allowing us to use the technology we need, and worrying about paying bills and meeting obligations later.
LOOKING AHEAD
What trends/regulations/issues do you think will transform your role as a trader?
We are big proponents of Reg NMS. We have been critical of soft-dollar practices, particularly with the inefficiencies and conflicts of interest that arise. We also fought for decimalization. In addition, I was selected by our trade group, The Investment Company Institute, to testify before the SEC during the Reg NMS hearings in New York a few years ago. Going forward, all of these efforts are things that we think will make the markets more efficient for our shareholders and traders.
What do you hope technology can change to make your role easier?
I don't know if we can really use the word "easier." Technology will certainly make us more effective and more efficient, and allow us to do a lot more with a lot less. It also allows us to be more accountable.
INTERNATIONAL TRADING
In which international markets do you trade?
We have international growth funds that tend to invest in developed markets, such as London, Germany, France, Hong Kong and Japan; and emerging markets funds that may go to less-developed emerging countries, such as India, Turkey, Indonesia and Malaysia.
Who do you use as a custodian bank?
It is a big name anyone would recognize, but I would prefer not to give it out.
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PORTFOLIO MANAGEMENT
Describe your relationship with your portfolio managers. Has it changed recently? Do you expect it to change?
We use what we call the portal model. We use senior traders to act as a portal, if you will, and assign them the responsibility of meeting the objectives and the goals of portfolio management teams. So, for example, a senior trader would be responsible for our value product; another would be responsible for our aggressive growth product. This has given the portfolio management teams a single point of focus within the trading room. So portfolio managers no longer go to individual traders in certain stocks. They go right to the senior trader, their portal.
Going forward, it's possible that some traders won't even sit in a big centralized room like we have here in Kansas City. As the manager of the desk over the years, I have seen the reliance on information sharing and interaction diminish as technology has developed.
ALGORITHMS
Types of algorithms used to trade:
We like IS [implementation shortfall] methodology, as we believe it most closely correlates with PM [portfolio managers'] expectations. We also use VWAP, or will use other algos if we deem the tool to be beneficial in minimizing costs.
Do you use algorithms for equities only?
On the equity side of the business, where I am, we do. I am not privy to the fixed-income side.
Which brokers' algorithms do you use?
All of the bulge-bracket firms', as you can imagine when you are managing $100 billion. But I would prefer not to identify where we focus that volume. But we do focus the bulk of our trading activity on the most-efficient, cost-effective broker-sponsored algorithms we can find.
Do you build your own algorithms?
No, we do not. But, in our view, an algorithm is really doing nothing more then hitting the keys on a keyboard much faster than a human being can do it. So in the sense that we employ the people on our desk, the trading tools and the technologies, we look at the combination of all of those efforts as one big algorithm.
How much of your order flow is traded electronically?
Seventy percent. When you run $100 billion, the information you give up with your order flow is more valuable than the execution value you give up in return. Trading is a cost. We view our role in the process as minimizing those costs as much as we can. Electronic venues provide us with a cost savings of 40 to 60 percent. ... Our view is that it is a little bit irresponsible to do all of your business with the broker-dealer community.
How do you rate your brokers and determine which broker will get your order flow? N/A
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Interview by Glenn Curtis
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