Interview: Pat Read, Head of Derivatives at ITG

Nov 30, 2011

Pat Read joined ITG in 2007, when ITG acquired Red Sky, where he was managing director and co-head of business development. He recently sat down with JLN Options editor Sarah Rudolph to discuss what’s new with ITG and how the company has integrated Red Sky into its operations.

Q: Can you talk a bit about what technology services ITG provides?

A: ITG has been a leader in the agency-only brokerage space since its inception in 1987, when it rolled out the POSIT crossing network. It has continued to push forward primarily in the institutional equities space. It began its life as an institutionally focused broker-dealer accessing US equity marketplaces and liquidity pools and has expanded to become a global presence in Europe, Asia, Canada and the Asia Pacific region. We have offices everywhere now and are catering to an expanding client base of institutional investors: the hedge fund community, the traditional buy side community, asset managers and institutional players.

Over the years, POSIT Marketplace has matured and grown in complexity. The Triton front end application has won numerous awards. It is ITG’s flagship product, from which clients can access POSIT Marketplace as well as view the entire suite of equity algorithms ITG has developed over the years.

ITG has been expanding its offerings, from pre-trade risk analysis to execution management to post-trade analysis of execution. We have always maintained the agency-only mantra, and it has done us very well in light of the issues with some of the global banks we traditionally would have competed with from an execution standpoint. Because we are an agency broker, we don’t carry the same risk these banks would. We don’t have the exposure, we’re not committing capital, we are not a custodian of the funds.

When ITG rolled out its new product and breadth of offering in 2007, it was getting considerable pressure from the Street to get into the derivatives space. Red Sky financial was a natural fit. Red Sky was an agency-only broker, a non-clearing FCM that started here in Chicago as a proprietary trading group. We developed a software suite to facilitate our own proprietary trading and spun that out into a broker-dealer and non-clearing FCM. ITG was able to leverage the technology we had built. We were ITG’s entrée into the derivatives space – primarily the listed equity options markets and listed futures markets here in the US. ITG’s client base, while primarily engaged in equity trading – long-short hedge funds and the like – was starting to get more involved in derivatives: volatility arbitrage on the part of a portfolio manager, for instance. ITG was not capturing the derivatives business that some of their competitors had at the time. We were a good fit to fill that void.

Currently we are working on a full integration of our product suite with ITG Inc.’s traditional product suite.

Q: Have volatility products been a big driver of interest for those clients?

A: One among many. I think ITG’s volatility-specific offering has suited the professional trading community rather than the traditional buy side community ITG had cut their teeth on. I think that’s shifting now. The hedge fund community more than the asset manager community is starting to look at things in terms of volatility. We’ve created some sophisticated tools that allow clients to take advantage of movements in volatility. I think that has come as a result of the Chicago trading community coming off the floor, these ex-market makers and sophisticated trading shops that ran sheets that thought in terms of volatility. When they were making markets there was always demand for a product that allowed them to trade in a sophisticated fashion. We had built those tools to facilitate our own trading, so it was a very easy translation. We are seeing the hedge fund community starting to adopt these sophisticated tools.

Q: ITG’s web site calls POSIT the first anonymous electronic matching system for institutional investors. What does it provide for your customers?

A: POSIT was developed in 1987. It was really the first dark pool or crossing mechanism to allow customer-to-customer crosses, giving the institutional client with large block orders the potential for a mid-market fill. The idea was to reduce market impact and execution costs and remain anonymous. ITG was a pioneer in the space and the first to gain a large amount of traction in that marketplace.

POSIT began as a once-a-day, auction type cross. The time frame has narrowed to continuous crossing. We have a number of liquidity filters and tools that sit in POSIT Marketplace constantly trying to achieve the best fill for our clients while maintaining anonymity and minimal market impact. POSIT also connects to the ITG algorithm suite, so all of the different algos that ITG offers on the equities side – TWAPS, VWAPS, Raider-type algos – the client has the choice to make POSIT part of that algo routing, so we go through and sweep the POSIT market before we go to other venues to look for a natural fit within our client base.

I believe we’re crossing more than 90 million shares a day on average in POSIT.

Q: What new developments in the industry has ITG incorporated into its technology offerings?

A: We’ve seen a shift recently. Everybody is talking about low touch. As a buy side provider, we try to create tools that allow clients to have lower touch access. Two years ago I never would have said this, but now we are seeing a hybrid approach: taking the traditional high touch capabilities, which ITG has always offered, and blending them with the low touch technology we have through our equity and derivative algorithms and POSIT Marketplace. So we’re blending high touch and low touch together. We thought we would all be left by the wayside, that there would be no market left for the traditional sales trader because everyone was using the sophisticated tools we were creating for them. But this high touch environment is alive and flourishing.

Also, ITG has recently acquired two research groups. As they did when they acquired Red Sky, they expanding their offering because they saw a hole in that offering in research. So now we have a very competitive full breadth of equity and derivative offerings globally.

We recently rolled out four new listed futures algorithms, which have been getting great traction from the buy side. We also added futures components into the traditional equity algos like dynamic implementation shortfall — that’s a list-type algo for our institutional client base. Adding a futures component to that for hedging capabilities or when they want to cover some exposure through the E-Mini at the CME. They can add that to the equity basket they are trading.

For us to be able to offer asset-agnostic trading tools has been very important and we’ve seen a lot of growth in that space.

Q: What is new on the options side?

A: We continue to push forward on that side as well, with new and enhanced features specific to smart routing. The market structure in US options is so fragmented, and so nuanced at each exchange. The nine US exchanges continue to compete with one another with exchange fees. They slice and dice their product set every which way, a
nd it’s a difficult beast for our clients to navigate. We developed smart routing logic to either reduce the fee or enhance the credit received back from these exchanges and dynamically rout that. This allows our clients to save quite a bit on the exchange fees.

We continue to try to stay on the front edge with our complex order routing. The CBOE and the ISE were the front runners in offering a complex order book. Now other exchanges are following suit, so we are giving our clients more access to that complex environment.

Q: Has the MF Global situation affected ITG at all?

A: The short answer is yes. We had some limited exposure to MF as a client and they were one of a few FCMs ITG used for clearing. We’ve had to help our clients who were clearing with MF Global to move their clearing business. But it didn’t have a big impact on our day-to-day business in the US. We were certainly lucky in that regard.

But a situation like that happening is not good for the industry in general. We are currently dealing with a lot of regulation. Right now we’re wrestling with becoming compliant with 15c3-5 market access regulations and the like. So it’s not good when we see things like this happening in the industry.

Q: Can you talk about ITG’s purchase of Majestic Market Research and Ross Smith, the two research firms it acquired last year?

A: The integration has gone well and is complete. We believe we now have best of breed in specific areas of research that have translated very well into ITG’s traditional client base. We’ve seen the client base that wasn’t traditionally using Majestic or Ross Smith be open to taking that in now. And the client base that was already consuming that research is now applying the research to the execution at ITG.

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