New Advisors to Plia Bring Deep Industry Expertise
Updated March 25, 2021
By: Bill Stephenson
Over the past month, Plia has formed a strategic Advisory Board, starting with Jeff Estella and Anita Karppi. Both Jeff and Anita have significant accomplishments in the capital markets industry and bring a wealth of experience to Plia. I am honored to have them both engaged with Dave Lauer and me as we continue to build out a platform that will bring standardization and automation to the information sharing process between asset managers and their partner broker-dealers.
I have known Jeff for many years and was always interested in his views on the business, particularly his thought leadership on market structure. His experience in compliance, best execution, governance, and fintech development will be a valuable asset for Plia as we scale the Plia platform globally. I look forward to collaborating with Jeff on how Plia can meet the needs of asset managers as best execution continues to be an evolving and important process.
Anita brings a very unique perspective and network to Plia through her deep relationships with the asset management industry in both Europe and Asia. Her creation of the global Buy-side Trading Community and her reach, dedication, and commitment to the industry over the last 13 years bring further credibility to the value Plia is working to create for users of the platform. I am very excited to have Anita's perspectives and insights embedded into our future product and service offerings, which we expect will be instrumental to our mission of creating value and reducing risk for both the buyside and sellside.
Are Asset Managers using KYB to CYA?
Updated February 25, 2021
By: Bill Stephenson
Asset managers are coalescing behind a new standard questionnaire in Europe and the US as part of their KYB (Know Your Broker) process. No, this isn’t just for electronic trading when they directly access a broker’s algorithms, dark pools, or DMA pipes. Asset managers are thinking more broadly around transparency and accountability for how their orders are routed within complex market ecosystems, including the broker’s internal crossing mechanisms. This is causing a deeper look at best execution protocols. Some brokers, especially those that are primarily ‘high touch’, have been caught flat-footed by these requests as they have never needed to respond to such detailed requests from their institutional customers.
For instance, asset managers want to better understand how their brokers utilize automated surveillance, manage information barriers, leverage volume tiers in routing tables, and maintain client confidentiality. As achieving best execution becomes more complicated, the need to be able to document, audit, and centralize this process becomes an exceedingly important part of the process. Asset managers know that this isn’t just about CYA but about understanding their broker’s practices and capabilities that will ultimately create better performance outcomes for their clients.
Plia will help brokers centralize requests from their institutional clients and scale responses across all their clients. It will also help asset managers organize and compare capabilities that align with their process. For more on KYB, visit: Know Your Broker to Achieve BestEx
Know Your Broker to Achieve BestEx
Updated January 26, 2021
By: Bill Stephenson
View original article on TabbForum HERE
Anyone who has worked on a trading desk understands how important it is to have a consistent process if they want to preserve or generate alpha for their clients. For investment managers, part of that process is understanding how brokers handle orders and manage the myriad of decisions they make on behalf of clients to deliver best execution. My partner, Dave Lauer, and I have spent the better part of the last two years speaking with investment managers about the best way to manage the broker review and communication process, and how it can be improved. We call it Know Your Broker (KYB), and we believe it is the most important and perhaps least developed component of best execution.
Currently, the expectation of investment managers relates not only to execution quality but also to the appropriateness of execution arrangements and broker policies. A proper review of these arrangements can be time-consuming and resource-intensive. The onus is placed on investment managers to review the full lifecycle and outcomes of trade execution, in addition to understanding the policies and procedures of each broker with which they trade. This expectation is not just for a point-in-time either, investment managers must have a process in place for doing these reviews on a regular basis.
KYB can create a significant workflow management challenge because an investment manager’s best execution policy should include a process for gathering, processing, interpreting, and collaborating on each broker’s policies and procedures. It is also incumbent upon each investment manager to determine whether a broker’s policies and procedures align with their own firm’s objectives for clients. This requires an investment manager to have its own clearly defined perspective on best execution as well as a strong sense of what is or is not appropriate given the circumstances.
The fragmentation of liquidity and the need for many trading partners and venues has complicated this process. Therefore, it has become increasingly difficult for investment managers to comply with each regulatory regime and to really understand how each broker operates. Dave and I believe that KYB expectations will continue to be a hot button item as asset owners, fund boards, and regulators increase their demand for transparency and accountability in the investment process. A simple start is through the standardization of information that asset managers require of their brokers to create a base level of transparency. Recently, Dave and I have collaborated with a team of industry leaders to devise standard questionnaires for Europe and the U.S. that should be a catalyst for engaging conversations around best practices. What we have found is that there are so many areas that investment managers care about and there are also a lot of topics where brokers want to be asked about because they feel as though their response would differentiate them relative to their competitors. Some of the areas of focus that I think are important are related to audit, venue selection, conflicts of interest, information leakage, risk controls, and surveillance.
To read more about the 2021 questionnaires or to obtain a copy, visit here.
As one broker recently stated to me, they receive hundreds of questionnaires from clients each year, so standardization would make their life easier since every client can ask the same question but in different ways. The panacea would be standard questions in a centralized platform instead of receiving spreadsheets, emails, or via other non-secure questionnaires; all with different formats. Enter, the PLIA Platform by Urvin.Compliance. PLIA is an end-to-end platform supporting all the important KYB activities performed by best execution committee members, heads of trading, and trading compliance officers. There is a huge opportunity here to de-risk some of the compliance challenges related to the best execution process and we believe PLIA is well-positioned to be a solution that can be utilized with minimal onboarding effort.
Due Diligence is Stuck in the Stone Age (or at least the 1990s)
Updated: May 1, 2020
By: David Lauer
Many of us have been through the due diligence process in one form or another. Whether you’re selling technology to a larger firm, being onboarded as a new broker or under consideration by an asset owner for an investment, you’re likely familiar with the process. While there are exceptions, the majority of the time, you’ll receive a word doc, PDF or excel spreadsheet by email.
Up until recently, this has been the only approach known to most firms. Rarely does anyone use a standardized questionnaire or RFI document.
There are so many things wrong with this process, it’s hard to know where to start!
Just focusing on the narrow use case of buyside firms doing due diligence on their broker counterparties (whether when onboarding a new broker or upon meeting annual compliance and best execution responsibilities), we can highlight an extensive list of issues. The problems with this process are significant, and can pose material risks to firms, whether from a legal / compliance perspective or from a trading and best execution standpoint. At a high-level, these risks include:
Failure to ask the right questions;
Difficulty interpreting the answers, and knowing how to identify areas of risk;
Inability to analyze responses across multiple counterparties, or evaluate how individual counterparty responses are changing over time;
Confusion over document versions, with multiple iterations flying back and forth over email;
Difficulty retracing every message and maintaining auditable records; and
A lost history of one-off requests and attestations, disappeared down a black hole of old emails.
This doesn’t even begin to address the unreasonable array of resources that brokers are being forced to devote to this process. Nor does it account for the liability that buyside firms face when evidence suggests they might have been provided warning of counterparty actions destined to face future enforcement measures.
As someone who has been involved in this process for several years, I can tell you how difficult it is to formulate these questionnaires and ensure that all appropriate questions are included, let alone answered. Even getting a set of firms (both buyside and sellside) to agree on all the right questions, or the right way to ask them, can be a long and tedious process.
While I was leading efforts to distribute questionnaires to, and perform due diligence and risk assessment of, ATSs (in the days before ATS-N), I found it difficult to compile responses across 20 or 30 firms, compare them to one another, make sure I was using the most recent version of various response documents, and find the information in those responses that revealed risk. Managing all of those word docs, PDFs and excel spreadsheets meant that things inevitably fell through the cracks.
I had the good fortune of not working at a regulated entity, so I did not have to concern myself with a future audit or regulatory examination. I did not have a compliance department or internal / external audit to worry about, and I had no legal exposure if I missed something in those responses that led to losses for my clients. The same cannot be said for buyside firms, who face all of these risks, and more.
This is the challenge that led to the recent launch of Plia, a collaboration between Plato Partnership and Urvin.Compliance. Plia is a modern, secure web application providing buyside firms a set of standard questionnaires to ensure that they are asking all of the right questions.
For brokers, Plia offers the ability to answer questions one time and distribute to multiple clients, all while accommodating a standard approval hierarchy and workflow. Plia provides transparency into the questionnaire completion progress, and provides a simplified means of communication between counterparties, including discussion around individual due diligence questions and trading outliers.
Plia’s analytics make it easier to view responses over time, or compare responses across counterparties. The Plia application also combines custom category and question weighting with grading, providing quick visualization of risk areas by both counterparty and category. The application also simplifies integration of this data into a more comprehensive broker scorecarding system. The end-user can audit and track everything directly on the Plia platform.
Plia also leverages AI and professional services to help its clients make sense of questionnaire responses, quickly identify material differences, and reduce the amount of effort needed to review all of these responses. On the immediate horizon, Plia will soon have an entire suite of features, as well as the functionality, to support a robust best execution process, and automate many of the mundane operating and coordinating tasks traditionally delegated to best execution committees.
As we work collectively to bring due diligence into the modern era, Plia streamlines what has historically been a clunky and inconsistent process. By bringing due diligence up to speed with the current trading environment, Plia may go a long way toward helping firms achieve best execution, reduce their vulnerability to enforcement action, and improve client outcomes.
For more information on Plia, contact:
The Art of Trading; The Science of Best Ex
Updated: April 14, 2020
By: Bill Stephenson
As a former global head of trading, achieving ‘best execution’ was something I always viewed as part art and part science. My trader colleagues understood the art of trading, but the hard part was actually the science; the quantitative measurement AND interpretation of trading outcomes. In the mid-1990’s, I became passionate about transaction cost analysis (TCA) and how we can improve our decision making and prove the execution value in the investment process.
We embraced measurement, the creation of unique benchmarks, and a mindset that aligned decision making with the long-term goals of the portfolios. Sounds easy, but it wasn’t. Traders are often measured trade-by-trade while portfolio managers and analysts are measured in months or years. It takes time to find balance, form a true meeting-of-the-minds, and ultimately create a benchmark aligning these three constituents--which I call the “Alpha Triangle.”
Though the process was not without its challenges, our firm was largely successful in training our focus on best execution within the context of the long-term investment strategy. Our process became well documented and scrutinized in regular reviews at our Global Best Execution Committee meetings.
The mid-2000’s saw a dramatic increase in electronic trading, growing reliance on algorithms and the overall proliferation of dark pools and exchanges. Trading had become increasingly complex; performance measurement increasingly difficult. Miscues by dark pools, broker-dealers, and exchanges only compounded this difficulty. Firms intent on maintaining high best execution standards felt the growing need for traders with a better understanding of market structure and the nuances of how various markets actually work. The game was changing quickly. Buyside traders faced a call for greater accountability. It was increasingly incumbent upon them to understand how their orders were handled, where they were being executed, and how these factors impacted trading costs.
For me, the tipping point came in late 2011, when one ‘dark pool’ settled charges with the SEC regarding false and misleading claims about trading with ‘natural liquidity.’ The good news from my firm’s perspective was that our executions in that venue, as we measured them, were adding value. It just wasn’t disclosed that they were principal transactions.
These events prompted us to ask an array of internal questions about the due diligence process when onboarding a new broker or new ATS. Even though the broker or venue provided value, were there reputational risks in trading with firms who don’t do what they say they do? Of course!
Besides our effort to collect the primarily private Form ATS filings from all the alternative trading systems, we began a deeper dive into evaluating all our counterparties; a huge undertaking. Collecting these filings proved to be just the beginning as we tried to unravel potential conflicts of interest among market participants and the overall complexities of the market.
By 2012, a buyside trader from another firm began to build a web-based system to engage broker-dealers as part of his firm’s due diligence and onboarding processes. That system was known as Plia and, in 2014, became a product for other asset managers. I viewed this as a much-needed system for central management of information that investment managers could acquire from their counterparties; brokers, trading systems, or even exchanges. Over the years, the system’s functionality and capabilities have improved, but the market structure and brokerage operations have only grown more complex.
For some, Plia was used to help avoid venues and brokers who could not or would not fully disclose their operations in a way that aligned with an investment manager’s best execution processes or values. It can add both a qualitative and quantitative aspect to best execution that will help any head trader or head compliance officer feel more comfortable about the risk management component of their remit.
As the complexities of trading increase across all asset classes, it is becoming more important that leaders in the asset management community develop standards with their counterparties such that all market participants will have accountability to each other in a constructive way. I believe that technology-enabled solutions developed by the industry and for the industry will mitigate risks in the investment and best execution processes, but it takes broad acceptance of such practices to truly make a difference for all.
For more information on Plia, contact: