Dow Veeranarong, Global Product Owner, EquiLend, and Andrew McCardle, Head of EquiLend Asia, believe trading desks can do more with NGT

Can you begin by telling us about the origins of Next Generation Trading (NGT)?

Dow Veeranarong: We have been building NGT throughout the last few years with the help of our client community. We have been looking at how they trade on our trading venues and discussing ways to make their processes more efficient. It is an ongoing, iterative process. The result should improve the way people are communicating pre-trade negotiations through trade execution.

Given the current tough environment for investment banks, do business heads view NGT positively or myopically as added IT cost?

Veeranarong: At EquiLend, we recognised that our existing trading venue, AutoBorrow, could be more flexible. Everyone is looking for operational efficiency. Everyone is under pressure to do more with less. NGT offers the opportunity for increased automation across the platform. For our clients, NGT is an investment in their own connectivity. Enhanced connectivity means more automated flow. It is true that firms have to invest and upgrade their own trading platforms. There are some upfront costs involved when it comes to system upgrades, and firms won’t invest those IT dollars without seeing benefits. Clearly clients see that benefit, as firms all around the globe are building to NGT.

What do clients see as the appeal of NGT? Is it the reduction of manual trades?

Veeranarong: Yes. Negotiations by email, messaging or phone take time. NGT allows lenders to publicise their available inventory multiple times a day. It allows brokers to respond efficiently. It cuts down on much of the back-and-forth of traditional trading. When party A and party B agree a rate, then it can be straight-through-processed into their proprietary systems.

Andrew McCardle: NGT also cuts down on mistakes caused by manual inputs. There is always the chance that someone puts the decimal point in the wrong place. Automation reduces the chances of that kind of human error happening.

Does this mean an end to the human element in broking transactions?

McCardle: Certainly not. This does not change or replace relationships. We would argue that greater operational efficiency achieved by NGT frees up more time to concentrate on the harder trades and to do them better. Just because NGT is more transparent does not mean that a lender shows the same rates to all parties. Instead, it permits better management of the rates being offered to each party.

What is your client base in Asia?

McCardle: The vast majority of trades in the region for EquiLend have been offshore to offshore. Historically, much of our business in Asia has been international players trading with each other. That is changing. In Japan, for instance, the three largest trust banks are users. We have found that as domestic firms learn about what the international firms have been doing, they tend to come onboard.

How does the business look geographically?

McCardle: We are most established in the most developed markets in Asia-Pacific, including Australia, Japan, Hong Kong and Singapore. Markets such as Australia are as sophisticated as any in the world. There is certainly revenue to be made in other regional markets, but the developed markets will continue to be important in the future. We should not lose sight of the fact that while the percentage of hard-to-borrow stocks in other Asian markets may be higher, the more developed securities finance markets in the region are so big that, in absolute terms, they are important sources of business for many firms. Having said that, there is great potential growth for NGT in emerging markets within the region. We expect to see that more and more in 2016 for markets such as Korea, which has a record of producing large revenue drivers, but also Malaysia and Taiwan because of the relative weighting toward hard-to-borrow stocks in these markets.

Given 2015 was a record year across Asia for securities lending, has this encouraged adoption of NGT as part of sensible investment for the future?

McCardle: Yes. Record years are always good, but by definition that means they have been very busy. This is where NGT comes in. If you think about North America, which is predominantly a general collateral (GC) market, most stocks are going to trade around 25bps or below. In Asia, securities tend to be harder to locate and therefore have a higher fee on average. By virtue of letting lenders push out their prices more transparently and with automated pre-trade negotiations, operations can become easier and more efficient to transact when using NGT. 

Is NGT just for general collateral?

Veeranarong: Definitely not. We built NGT to create efficiencies in the warm and special trading environment in addition to GC trades. With NGT, firms may continue to automate their GC flow, as they have historically done on AutoBorrow, but also their warmer trades as well. For special trades, the platform also allows traders to manually negotiate these higher-touch transactions. NGT works from system to system (fully automated), from system to human (one side automated) and from human to human (manual). Therefore it covers GC, warm and special trades across equities and fixed income, all in one place. Historically the various trade types would be conducted on different EquiLend venues or via phone or email, so NGT creates efficiencies by bringing that workflow together on one platform.

What is your outlook for the years ahead?

McCardle: We have had a good year in Japan in particular. Clients there needed the benefit of workflow on NGT in action. We expect offshore to offshore business to grow in Korea and Taiwan. That will filter down to local brokers and should encourage them to sign up to the system. There is some domestic-to-domestic flow in the region already. For 2016-17 we expect the work already done to give us a springboard to conversations in the emerging Asian markets. That way, we keep the collaborative spirit of NGT. Clients will help us focus where our priorities should be.

This article appeared in Global Investor/ISF's Securities Finance Asia Pacific 2016 guide.