World Economy

Investors Club Together to Control Markets

Investors Club Together to Control Markets Investors Club Together to Control Markets

Stock investors who recognize the risks of trading in anonymous “dark pools” but are unwilling to spurn them have found an alternative: club together.

A growing number of European investment funds have signed up to use an electronic trading system designed by one of their own – Finland’s Pohjola Asset Management – which offers the ability to dissect and control the way their market bets are routed to dark pools and other exchanges across the region, Reuters say.

The data they generate is shared among the group, giving them strength in numbers but also leeway to change strategies.

This might seem like little more than back-office tinkering to the uninitiated - after all, fund managers are paid to decide which stocks to buy, not the minutiae of where to trade them. That job is usually left to brokers and banks, which often run their own dark pools while also offering access to rival venues.

But investors want more control and transparency over the trading process, fearing the post-crisis proliferation of opaque private markets and high-speed electronic traders has exposed them to new risks that can rack up costly losses.

These risks include a lack of disclosure about how some venues operate and price trades, as well as the danger that some give an unseen advantage to high-frequency traders.

“For many years, investment banks and other electronic brokers have provided electronic order-routing mechanisms ... But once an order goes behind a firewall it’s very difficult to maintain total control over it,” said Adam Conn, head of trading at Barings Asset Management, a user of the Pohjola router.

“There is a growing empowerment within the buy side (investors) and that’s a healthy development.”

 No Conflicts

Rather than try to outgun rivals with souped-up algorithms, Pohjola’s system aims to reduce conflicts of interest by putting fund managers – not brokers – in charge of where to send trades. By comparing notes on each venue’s performance, Pohjola and its clients make tweaks accordingly.

Designed by a team led by former Pohjola head trader Simo Puhakka, as well as ex-broker David Berney and electronic-trade specialist Keith Wright, the router is pitched as a bias-free and transparent alternative to putting trades in the hands of a broker who may have financial incentives to use certain venues.“You can’t rely on or trust solely what your broker delivers,” said Puhakka in an interview. “We realized we should create a better solution, a better smart order router.”