Following significant changes in the Transition Management landscape in recent years, it is timely to review one of the most important developments within the industry, the growing complexity of global trade execution. Originally, the vanguard of complexity within Transition Management were the operational aspects of the service, settling trades and managing cash-flow in highly diverse global markets, a majority of time utilizing physical scrip. Trade execution was often of less concern as there was a single exchange in each market where a stock could be traded and managing explicit costs was the primary metric of success - in most cases the technology did not exist to allow for the measurement of the implicit costs of a transaction.
Today’s operational landscape bears little resemblance to the processes of the past following the global revolution in infrastructure and trade processing, a testament to the success of enlightened regulators as much as technological advancement. The utilization and success of SWIFT, electronic trade confirmation, and other settlement and cash systems have allowed a trade in Hong Kong or New Zealand to settle with the same efficiency as a US trade, virtually eliminating complexity and settlement failure. So if operational complexity is no longer the keystone of Transition Management, what has taken its place?
In recent years, the fragmentation of the exchange marketplace has come to define the new realities of successful Transition Management. Legacy exchanges have seen market share bleed away into dozens of new exchanges with a myriad of lexicons including electronic crossing networks, multi-lateral trading facilities, alternative trading systems, and dark pools. In the past a share of IBM could only be traded on a single exchange, the NYSE. Today that same share can be traded on 48 diverse global venues, each offering unique liquidity, crossing, and pricing alternatives. In this new world order, Transition Managers will be required to invest in the systems and technology necessary to allow them to effectively and efficiently source liquidity within these diverse markets.
The speed of the fragmentation of markets shows no signs of slowing. Eighteen months ago nobody in the marketplace had heard of Chi-X; today it is the fifth largest exchange in Europe measured by notional turnover. Navigating these new execution venues becomes more important every day, and requires significant investments in trading technology and smart order routing to create benefits for the client. Many venues, in particular Dark Pools, can now offer ‘free’ trade execution and advertise no market impact - a virtual utopia for Transition Managers that have spent years attempting to control these explicit and implicit costs through advanced multi-day trading strategies. Are Transition Managers prepared to accept the trade off on behalf of their clients for these benefits when ‘free’ execution is provided in exchange for client indications of interest? Client confidentiality may become the new implicit cost metric if Transition Managers fail to understand how client data is being utilized and routed between these diverse liquidity pools.
Envisioning the future of Transition Management, in light of the changes to the industry in recent years, is not difficult - sourcing liquidity through an ever growing network of trading venues will come to define the success of a transition. Controlling the execution of a client trade with the full knowledge of the true costs of these diverse execution venues, whilst maintaining the technological capability to navigate these exchanges while preserving client anonymity, will come to define the success of the Transition Manager of the future.
Richard Surrency is Executive Director of Morgan Stanley’s Transition Management Solutions business, based in Singapore