August 20, 2012

As the head of U.S. equity trading for RBC Global Asset Management, which has $260 billion in assets under management, Ryan Larson often focuses on liquidity analysis to avoid being gamed by high-frequency traders. Like other traditional asset managers, Larson relies on quantitative tools and pre-trade analytics to estimate transaction costs, but unlike many of his counterparts, he also emphasizes the human element in trading decisions. And rather than use off-the-shelf algorithms, Larson says, the firm devotes time and resources to customizing algos.


What is your firm's trading structure?

Larson: RBC Global Asset Management has three equity desks, headquartered in Chicago, Toronto and Vancouver. Our desk in Chicago is solely focused on institutional assets in the U.S. equity space, ranging from micro-caps to large-caps.

How many traders do you have?

Larson: We have two full-time U.S. equity traders.

Describe your investment style and trading strategy.

Larson: We're bottom-up, fundamental, long-term investors. From a trading standpoint, we incorporate macro indicators, technical analysis and momentum factors to develop effective trading strategies to ensure best execution is achieved for our clients. We also perform liquidity analysis on our portfolio holdings, especially for micro-caps and small-caps, which often require more trading expertise due to the less-liquid nature of those securities. We use quantitative trading methods and rely heavily on the technology the desk has available to execute our orders.

We're using quantitative pre-trade analytics to come up with estimates of market impact and monitor the trading performance in real time against that pre-trade estimate to ensure our desired outcomes are achieved. We have used Abel Noser's transaction cost analysis tools going back more than a decade to measure our trading performance. While technology is a great tool and has certainly shaped the current market environment, we want our traders to be experts in market structure and regulation and to have the right skill set and technology on the desk to access multiple market centers as liquidity continues to be fragmented.

How important is the human element to your trading?

Larson: I could walk you through our trading desk and show you all the flashing screens, all the algos and all the dark pools; but at the end of the day, if the trader behind those algorithms or dark pools doesn't understand the mechanics of those quantitative trading strategies, obviously that can be very detrimental to markets. The human element is very important to our trading, and I think it's a healthy mix of human capital and technology capital that provides the best results.

What percentage of your flow is executed electronically?

Larson: Roughly 65 percent of our orders execute electronically, while 35 percent are executed in a traditional sense, whether using a cash desk or human execution. However, there is always some human component in everything we do, such as deciding which algorithm to use or on which venue to execute; there is a level of human oversight for every order at our firm.

Do you use dark pools?

Larson: Most days, if not all, we access liquidity in dark pools. However, we use dark pools with strict limits. We use minimum fills; we use dark pools with limits; we also use liquidity analysis to look at the characteristics of dark pools to determine whether certain dark pools are toxic order flow or have negative high-frequency trading activity in terms of reversions prior to seeking liquidity in those venues. We make sure we've done our homework on those venues prior to seeking liquidity in dark pools.

What kinds of dark pools do you use?

Larson: Dark pools that are more tailored to specific block-trading capabilities. Certainly, accessing broker internalized order flow is an option. We execute with the Street and would favor broker internalization of order flow if it meets certain characteristics in terms of not exceeding certain thresholds. We would never want to see 100 percent of our order flow being executed internally if there are other options available.

What types of algorithms do you utilize?

Larson: Most of our algorithms are outsourced from third-party firms. We stay away from VWAP- and TWAP-types of algos just because those run the most potential to be gamed in the market. Our strategies are a hybrid of many different strategies, such as algos that access dark pools and algos that access a combination of dark and lit markets. Some are based on movement of prices. We're not heavily reliant on one specific strategy.

Do you write your own algos?

Larson: Currently we do not write our own algos; that's very time-consuming and requires a lot of capital. We like to focus on delivering trading, investment and service excellence to our clients. We meet with third-party firms, bring them in and let them understand our desk needs, how we operate, our order characteristics and consult with them to customize our algos.