The shopping list

When we talk about buying and selling shares, the typical film images of the New York Stock Exchange on Wall Street quickly come to mind. Lots of noise, lots of stress, stockbrokers with two phones at the same time shouting BUY!, SELL! I must say that what we do at the Cobas AM Dealing Desk is quite different from that world.

It is important to differentiate between two terms that you may have heard or read before:

• – BUY SIDE is the financial term that refers to “buyer” institutions in the markets. They are in charge of managing a portfolio of various financial products in order to generate profits for their investors. (investment fund managers, pension fund managers and hedge funds).
• – SELL SIDE is the financial term used to refer to investment banks, brokers and other firms that take orders from the BUY SIDE and execute them in the market. These orders can be on stocks, bonds or derivatives (an example is MORGAN STANLEY, JP MORGAN or CITIGROUP).

Once we have identified the players on the board, we are going to explain, in broad terms, what the trading desk’s work consists of.

We could say that our daily task is basically to go shopping. Let’s imagine that our portfolio is the menu and to put it together we have to buy the ingredients.

To do this, every day we will have three basic pieces of information about our portfolios updated first thing in the morning:

• Number of securities -> This consists of counting the purchases/sales we make on each asset daily to obtain the number of shares in the portfolio.
• Prices -> We take the real time prices of each of the assets that make up the portfolio.
• Cash -> The money or investable cash that we have after accounting for subscriptions, redemptions, financial events, etc. that have occurred in the fund.

All this information is stored and updated in our portfolio management software.

Now, all that is missing is the shopping list. This list is provided by “Chef Paramés”.

We have several strategies/menus which are:

• International
• Iberia
• Large Companies

Depending on the menu we have to configure we will have to buy the most common and easy to find ingredients in any market (Large Companies) but we will also have to buy some “delicatessen” which as you can imagine are much more difficult to find and are subject to higher costs.

Therefore, once we have the list of things to buy, we go to the supermarket and start to “add to cart”.

First we make an exact calculation of the quantities to buy or sell of each asset/ingredient to achieve a perfectly cooked dish. If at any time we add too much salt, fats or sugars, i.e. any kind of potential non-compliance, our portfolio management system will alert us and we will take the necessary measures.

Once we have calculated the ingredients, we add all these products to the cart and from there we select in which market/markets the best deals are available.

Our list of suppliers/brokers is very extensive, we work with more than 30 counterparties. It is a great advantage to have such a large number of options as it is like shopping in a large shopping centre, where we can find practically everything, some shops will give us exclusive access to seasonal products and others, which are like the Gourmet Club, for when we have to buy white truffles, which are very present in our menus. It is precisely these types of ingredients that make us stand out and makes us exclusive.

Once we send our orders/ingredients to the brokers, they are in charge of going to the market and delivering them to our home.

When we want to buy basic ingredients, we will select a bulk purchase, as we know that they are easy to find due to their abundance and do not require a lot of effort. This is what is known as a “low touch” service and is executed by algorithms.

When we have to buy more complex ingredients, either because of their location, scarcity or exclusivity, we use a premium service, a “personal shopper” called “high touch”.

That said, let’s imagine we are in a fish market to buy sardines, the auction will start and we will probably be able to buy the amount we need and reach an agreement on the price quickly. But if we want to buy Galician barnacles, things change.

We must bear in mind that a large quantity will not be offered as they are very scarce and difficult to catch. Therefore, it would be best to buy them in Galicia and, if possible, directly from a “percebeiro”. In other words, buy them locally or even directly if you know the person who collects them. Within our network of brokers we have what we call “niche” brokers. These are usually small brokers, located in the markets where the stock we are looking for is traded, and who usually know and have contact with the main shareholders. Consequently, they can provide us with greater liquidity without impacting the share price.

But what if we have a wedding and have to buy large quantities of any of these ingredients? This is where other types of counterparties come into play that are also within our matrix.

Have you heard of dark pools? You probably have. We can define it as a kind of private, restricted-access market in which large quantities of shares are traded with no impact on the price (large blocks). The most important names of these pools include Liquidnet, BIDS/CBOE and POSIT.

Once we have bought everything we need to carry out the different menus, it is time to cook them well and then to see, over time, if we have made good acquisitions and if they were of good quality.

You, as customers, are the ones who will give or take away the precious Michelin Stars.