A little more than 18 months ago, JP Morgan hired Frank Troise as managing director and head of global electronic trading to build out the firm's electronic client solutions (ECS) business globally. Since then, Troise has been tasked with revamping the bank's algorithms for equities trading, aggregating internal liquidity, forging a team of market experts and establishing a management team beneath them to deliver product to Europe and Asia with global consistency.
"Our No. 1 objective is best execution," relates Troise, who joined JP Morgan from Barclays Capital in April 2010. "And we have pursued several programs to achieve it."
According to Troise, JP Morgan has created a multiyear investment plan to underpin the effort. Though he won't discuss specific dollar amounts, Troise reports that JP Morgan is "making significant investments in electronic trading." He adds, "Given the importance of technology in this space, the investment is not limited to two or three years, but is going to be continuous."
For starters, the firm has beefed up its quant team, hiring about two dozen quantitative analysts, and is building a laboratory to work on applied science projects. New hires range from doctoral graduates straight from academia to experienced personnel from the buy and sell sides who bring practical cross-asset-class experience, says Troise.
Some of the new quants have worked at other large investment banks, JP Morgan acknowledges. Others have spent time at high-frequency trading or electronic market-making shops or stat arbitrage hedge funds.
In addition to building out the quant team, there is a focus on aggregating JP Morgan's internal sources of liquidity, including the integration of order flow from the bank's custodial business, transitions and private client business, which feeds into JPMX, the firm's dark pool, Troise reports. "An important factor in achieving best execution is having access to natural liquidity as early as possible in the trading process," he explains.
According to Laurie Berke, principal at Tabb Group, the new mandate at JP Morgan is to establish the firm's competitive electronic trading capabilities globally, which was not a priority in the past. In Tabb Group's U.S. Equity Trading Report for 2010-2011, JP Morgan ranked tenth based on frequency of mention as a top-five algo provider, in a tie with ConvergEx and Weeden, Berke says, noting that all three were mentioned by 11 percent of Tabb Group's year-over-year participants as a top-five provider.
In 2009, she notes, JP Morgan was cited by 16 percent of participants as a top-five algo provider, ranking No. 11 in frequency of mention. By comparison, Credit Suisse was mentioned most frequently as a top five-algo provider in both 2009 and 2010; the firm was cited by 69 percent as a top-five provider in 2010 and by 71 percent in 2009.
"Bringing in Frank is an indication that JP Morgan was placing a higher priority and strategic focus on electronic trading than they had in the past. His arrival confirms that commitment," says Berke. "He's cleaning up the product suite; he's turning it into what it needs to be. He is spending time making sure that the consistency happens globally, and that is a winning strategy."
After rolling out a host of new products in the first half of 2011, JP Morgan has finished the upgrade of its algorithm suite, Troise reports. "We have a highly competitive algo suite across the globe," he asserts.
The buy side, however, is inundated with sell-side algorithms. According to Troise, the client community wants simplifed algorithm offerings that focus on how the strategies behave. In response, JP Morgan retired Arid, a passive liquidity-seeking strategy, and merged it with Aqua, an existing strategy that was extended to cover a range of behaviors, from "dark, which is very passive, to 'just get it done,'" says Daniel Ciment, a former Lehman Brothers and ITG executive who is managing director and head of electronic trading solutions in the Americas for JP Morgan.
The approach with the algorithm products, according to Troise, was to drive pricing, timing and size decisions using quantitative models rather than around heuristic behaviors, such as "if, then" statements. One example, Ciment says, is the Analytic Signal Engine, a framework for pricing orders into dark pools.
"It is the engine that pumps various indicators -- for example, anti-gaming signals -- into our algos, which helps our clients achieve best execution," explains Ciment. The quant team also developed several new models, including adaptations for clients of high-frequency trading models from the firm's market-making unit, he adds.
At the same time, JP Morgan is upgrading its core technology infrastructure, including data centers and networks, to boost its computing power as it relates to the firm's best execution capabilities, Ciment relates. "We've been extensively upgrading our quantitative models, algo trading framework and technology," he says.
The effort to build out electronic trading capabilities is not unique to JP Morgan, according to Tabb's Berke. For example, "You are seeing a number of firms take advantage of the environment to hire skilled people who are available, and they are probably available at a good price now," she says.
As OTC products migrate to electronic trading and clearing, Berke adds, all of the global investment banks are looking for ways to accomplish this across asset classes and by region. "Some are doing that opportunistically by acquiring skill sets and local market knowledge and relationships," she says.
But right now, Berke concedes, the sell side faces some significant competitive challenges. "There is pricing pressure, mature businesses, over capacity; the buy side is over-covered and firms have limited ways and money to pay [for sell-side services]," she observes. To create distinction in the current market, Berke says, JP Morgan has to leverage its investment in technology to generate additional revenues; it has to grow market share, grow geographically and move into new asset classes, she adds.
While the investment in robust trading capabilities, connectivity and routing, and reducing transaction costs needs to be ongoing, however, "Client-facing people also can make a difference," Berke points out. "If a sell-side firm like JP Morgan can demonstrate that it can work with the client as a partner to add value in conjunction with its tools and technologies, I think that's the whole package," she comments.
Accordingly, one of Troise's priorities has been building a top-quality sales and trading coverage team with expertise in local markets. "There are clients based in the U.S. and Europe who have trading desks on Asian hours, and we service them," relates Marcus Consolini, who runs JP Morgan's electronic sales and trading in Asia. "When you talk about a global platform, the backbone is global, but everything else is developed in the regions for the region. You can't do it otherwise," explains Consolini, who manages desks in Sydney, Tokyo, Hong Kong and Mumbai, each with its own regulations, execution types and trading nuances.
Sharing Global Intelligence
Meanwhile, new trading models are developed concurrently across the globe, and that intelligence is shared across regions, says Peter Ward, a former Townsend Analytics executive who now runs JP Morgan's electronic trading solutions in the EMEA. For example, a limit order pricing model was developed in Asia by the quant team there, but it is being implemented by the three regional teams across the globe to optimize the model for each region. "We have a global platform, but there are going to be nuances in each of the regions," Ward notes.
"It's not a U.S. export model, where everything is done in the U.S. and then sent to Europe, sent to Asia," emphasizes Troise. "We're running a global operation with products, models and infrastructure designed and deployed in various regions and then exported, whether it's from Asia to the U.S. or from Europe to the Americas."
Troise says he recently visited the firm's clients in Tokyo, where he kicked off a 10-week campaign to educate them on JP Morgan's offerings. And in August, he notes, he was in Brazil, a growth market where the firm's algorithms have been running for the past few years. "I was talking to clients about the algorithmic capabilities and our investment plans and forming our investment agenda," he relates.
Back in the U.S., according to JP Morgan, the firm's clients are reaping the fruits of its labors. When equity volumes exploded in August and September, JP Morgan's infrastructure was ready to handle the load, Troise insists. "We were able to handle it all due to the capacity upgrades and product upgrades that we put into production over the last 18 months," he says. "It showed our clients how real our investment has been. The algorithms performed the way they were supposed to, and the trading infrastructure had the capacity to withstand the volume. If there was ever a test to the Street, it was in August; and we received very high marks."