TAO: Honing your competitive advantage
16 May 2017
David Martocci, global head of agency lending at Citi, lifts the lid on the TAO securities lending platform, and why it’s such a formidable tool for its traders
Image: Shutterstock
How have you seen the securities lending business change over the past few years?
The business is quite resilient and continues to adapt and make the appropriate changes to succeed. We are quite fortunate that our agency securities lending business resides in the markets and securities services division of our firm, as we have better access to technology as well as macroeconomic market data and insights to develop our offering.
The securities lending market is now much more competitive and investment managers are therefore more focused on using it as an active investment tool. For years, I have referenced securities lending income as the missing cash flow for investment managers who haven’t participated in securities lending.
How has Citi changed its approach to securities lending?
We have seen the market dynamics change and over the past few years and have changed our focus accordingly. We definitely take a much more analytical and quantitative approach to securities lending. The focus of our programme has shifted towards extraction of maximum value in a portfolio with minimal risk to our clients. We hired dedicated quantitative analysts who sit alongside our strategic traders in order to understand the global trading processes, with the aim of making it more efficient from a risk reward dynamic. The result was a custom-built big data solution called Trading Analytics and Optimisation, better known as TAO.
TAO is our proprietary analytics engine that standardises and unifies our trading best practices globally. With traders in Sydney, Hong Kong Dublin, London and New York, it is imperative to have a unified tool that synthesises the market data and helps determine the best opportunity for distribution. TAO was designed to give our traders a single platform to access all relevant market data and also provide real time insights that leverage all external as well as internal sources—our proprietary trading data sets. All this data is fed into computationally heavy programs that run on cutting-edge technology and sift through billions of data points to identify revenue optimisation opportunities across our entire book. TAO went live in early 2013 and continually evolves to create efficiencies on the desk that enable us to stay one step ahead of the competition with smarter data-driven decision making.
How does TAO help Citi’s traders to outperform their peers?
We focus on a number of factors to achieve the most optimal level of sustainable revenue from our clients’ portfolio. Focusing solely on best rate is inefficient and can create large swings in daily revenue due to volatility of utilisation. TAO uses quantitative analysis to study the supply and demand equilibrium for each security and identify optimal revenue extraction opportunities based on multiple factors like fee, utilisation, and duration, to name a few.
TAO provides our traders comprehensive real-time descriptive analytics that identify market triggers. Traders use these to make well-informed decisions, for smarter price discovery, re-rate optimisation, intelligent distribution of inventory, and real-time analysis to monitor and minimise risk. We also created some proprietary metrics that guide our traders and prescribe them an optimal course of action for each security and ultimately aim to optimise revenue across multiple underlying factors. These metrics leverage Citi’s large data sets of historical transactional data and are now central to our trading philosophy. The platform becomes an even more powerful tool for the traders with its use of Citi proprietary metrics. These metrics leverage our large historical data sets and guide our traders, prescribing an optimal course of action for each security that helps optimise revenue based on multiple underlying factors. TAO has put data at the heart of our strategic decision making process and the analytics have enabled our traders to improve effectiveness of their actions and consistently extract maximum value for our clients.
How important are the data sources?
One of TAO’s biggest strengths is that it is global and therefore pulls in data for all securities lending markets at once. This transparency means if one trader is working through price discovery for a security then that information goes into the system and all our traders benefit from it in real time.
TAO leverages our vast internal data sets and also taps into external market data sources to pull down relevant information for all securities that are trading in the securities lending market. It then uses various data mining techniques to derive insights and discover patterns that point towards any repetitive behaviour. For instance, through these techniques we are able to better analyse borrowers’ historical behaviour with respect to returns and re-rates, which allow our traders to find the best strategic placement for securities. Some of the metrics used in this analysis include the number of recent loans, their duration, their relative fee—all of which help frame the trading style of each counterparty within our global business.
How else does TAO strengthen Citi’s hand?
Its value proposition is more than simply driving automation, efficiency and transparency. Having a consistent quantitative lens allows us to measure all aspects of our business and gives us real time visibility into our clients’ earnings, balance, and availability profiles across various asset classes, markets, sectors, and supply chains. We use this information to carefully manage existing relationships, nurture special securities, and extract the optimal risk adjusted return for our clients.
TAO is already our core platform that sets rates for all electronic and auto-lending activities. We are constantly refining these rate tools and moving towards our ultimate goal of building a stable predictive model. TAO also enables us to be significantly more proactive with borrowers. We are able to streamline our engagement with borrowers to focus on higher revenue loans, reduce portfolio churn, and maximise loan duration. We have built intelligence in TAO that enable us to strategically push inventory in the market without cannibalising our existing book or perpetuating refinancing. This improves our relative utilisation and allows us to extract maximum relative value from our clients’ portfolio.
How does TAO benefit your beneficial owner clients?
All beneficial owners that participate in our securities lending programme benefit from improved risk-adjusted performance of their portfolios. Using TAO’s constantly evolving quantitative strategies and efficient decision making, our global trading team is able to outperform the market and achieve relatively higher total returns for our clients.
TAO gives our traders the ability to identify every upcoming corporate action opportunity, with an indicative timeline and potential revenue. Having this information readily available early on allows us to quantitatively assess the various routes to market (securities lending route versus execution market) and engage our clients to make better informed decision. In addition to driving the top line, TAO has a comprehensive suite of modules for risk monitoring that quantify how much stock we can freely transact based on the perceived liquidity within the securities lending market and the execution market. This is particularly useful to manage recall risk in sensitive markets, without the administrative burden of programme-wide pre-sale notifications. We have also built custom dynamic liquidity measurement approaches for individual clients and implemented automated communications directly with their portfolio managers.
TAO looks at the macro factors as well as other esoteric risks especially relevant with securities lending in emerging markets to ascertain trends early on and allows us to carefully extract fair value with risk premium. For instance, having an automated solution to monitor foreign ownership limits allows us to unlock revenue from a deeper pool of assets in Asian markets. With our goal of extracting maximum risk adjusted returns for our clients, we have also partnered with some of our beneficial owners and built custom solutions in TAO to address their unique requirements.
How do you review the performance of portfolios?
TAO has a dedicated module for measuring performance attribution which allows us to quantify relative outperformance for all securities in our entire global trading book. This module can be filtered to view performance for a specific client and allows us to drill down into a single security, market, sector, and portfolio.
Through this performance attribution module we get a lot more than just metrics of our relative outperformance. This module attempts to provide a comprehensive picture to help qualify our performance. It provides a granular breakdown of market factors that we were able to leverage for excess performance and transparently lays out any missed opportunities. Our client executives and relationship managers also have access to TAO Trends, which is a version of TAO that pulls in large data sets of historical information and presents visuals to understand trends, averages and ranking over longer periods of time.
TAO Trends also tracks performance benchmarking for some of our portfolios that trade as an exclusive. TAO Trends is also used during performance reviews to provide rich performance attribution analysis at an individual client portfolio level.
In conclusion, TAO has successfully become Citi’s competitive advantage and has been one of the drivers of growth for our business. We have a significant head start in this venture and continue to invest more in building new iterations of this product.
The business is quite resilient and continues to adapt and make the appropriate changes to succeed. We are quite fortunate that our agency securities lending business resides in the markets and securities services division of our firm, as we have better access to technology as well as macroeconomic market data and insights to develop our offering.
The securities lending market is now much more competitive and investment managers are therefore more focused on using it as an active investment tool. For years, I have referenced securities lending income as the missing cash flow for investment managers who haven’t participated in securities lending.
How has Citi changed its approach to securities lending?
We have seen the market dynamics change and over the past few years and have changed our focus accordingly. We definitely take a much more analytical and quantitative approach to securities lending. The focus of our programme has shifted towards extraction of maximum value in a portfolio with minimal risk to our clients. We hired dedicated quantitative analysts who sit alongside our strategic traders in order to understand the global trading processes, with the aim of making it more efficient from a risk reward dynamic. The result was a custom-built big data solution called Trading Analytics and Optimisation, better known as TAO.
TAO is our proprietary analytics engine that standardises and unifies our trading best practices globally. With traders in Sydney, Hong Kong Dublin, London and New York, it is imperative to have a unified tool that synthesises the market data and helps determine the best opportunity for distribution. TAO was designed to give our traders a single platform to access all relevant market data and also provide real time insights that leverage all external as well as internal sources—our proprietary trading data sets. All this data is fed into computationally heavy programs that run on cutting-edge technology and sift through billions of data points to identify revenue optimisation opportunities across our entire book. TAO went live in early 2013 and continually evolves to create efficiencies on the desk that enable us to stay one step ahead of the competition with smarter data-driven decision making.
How does TAO help Citi’s traders to outperform their peers?
We focus on a number of factors to achieve the most optimal level of sustainable revenue from our clients’ portfolio. Focusing solely on best rate is inefficient and can create large swings in daily revenue due to volatility of utilisation. TAO uses quantitative analysis to study the supply and demand equilibrium for each security and identify optimal revenue extraction opportunities based on multiple factors like fee, utilisation, and duration, to name a few.
TAO provides our traders comprehensive real-time descriptive analytics that identify market triggers. Traders use these to make well-informed decisions, for smarter price discovery, re-rate optimisation, intelligent distribution of inventory, and real-time analysis to monitor and minimise risk. We also created some proprietary metrics that guide our traders and prescribe them an optimal course of action for each security and ultimately aim to optimise revenue across multiple underlying factors. These metrics leverage Citi’s large data sets of historical transactional data and are now central to our trading philosophy. The platform becomes an even more powerful tool for the traders with its use of Citi proprietary metrics. These metrics leverage our large historical data sets and guide our traders, prescribing an optimal course of action for each security that helps optimise revenue based on multiple underlying factors. TAO has put data at the heart of our strategic decision making process and the analytics have enabled our traders to improve effectiveness of their actions and consistently extract maximum value for our clients.
How important are the data sources?
One of TAO’s biggest strengths is that it is global and therefore pulls in data for all securities lending markets at once. This transparency means if one trader is working through price discovery for a security then that information goes into the system and all our traders benefit from it in real time.
TAO leverages our vast internal data sets and also taps into external market data sources to pull down relevant information for all securities that are trading in the securities lending market. It then uses various data mining techniques to derive insights and discover patterns that point towards any repetitive behaviour. For instance, through these techniques we are able to better analyse borrowers’ historical behaviour with respect to returns and re-rates, which allow our traders to find the best strategic placement for securities. Some of the metrics used in this analysis include the number of recent loans, their duration, their relative fee—all of which help frame the trading style of each counterparty within our global business.
How else does TAO strengthen Citi’s hand?
Its value proposition is more than simply driving automation, efficiency and transparency. Having a consistent quantitative lens allows us to measure all aspects of our business and gives us real time visibility into our clients’ earnings, balance, and availability profiles across various asset classes, markets, sectors, and supply chains. We use this information to carefully manage existing relationships, nurture special securities, and extract the optimal risk adjusted return for our clients.
TAO is already our core platform that sets rates for all electronic and auto-lending activities. We are constantly refining these rate tools and moving towards our ultimate goal of building a stable predictive model. TAO also enables us to be significantly more proactive with borrowers. We are able to streamline our engagement with borrowers to focus on higher revenue loans, reduce portfolio churn, and maximise loan duration. We have built intelligence in TAO that enable us to strategically push inventory in the market without cannibalising our existing book or perpetuating refinancing. This improves our relative utilisation and allows us to extract maximum relative value from our clients’ portfolio.
How does TAO benefit your beneficial owner clients?
All beneficial owners that participate in our securities lending programme benefit from improved risk-adjusted performance of their portfolios. Using TAO’s constantly evolving quantitative strategies and efficient decision making, our global trading team is able to outperform the market and achieve relatively higher total returns for our clients.
TAO gives our traders the ability to identify every upcoming corporate action opportunity, with an indicative timeline and potential revenue. Having this information readily available early on allows us to quantitatively assess the various routes to market (securities lending route versus execution market) and engage our clients to make better informed decision. In addition to driving the top line, TAO has a comprehensive suite of modules for risk monitoring that quantify how much stock we can freely transact based on the perceived liquidity within the securities lending market and the execution market. This is particularly useful to manage recall risk in sensitive markets, without the administrative burden of programme-wide pre-sale notifications. We have also built custom dynamic liquidity measurement approaches for individual clients and implemented automated communications directly with their portfolio managers.
TAO looks at the macro factors as well as other esoteric risks especially relevant with securities lending in emerging markets to ascertain trends early on and allows us to carefully extract fair value with risk premium. For instance, having an automated solution to monitor foreign ownership limits allows us to unlock revenue from a deeper pool of assets in Asian markets. With our goal of extracting maximum risk adjusted returns for our clients, we have also partnered with some of our beneficial owners and built custom solutions in TAO to address their unique requirements.
How do you review the performance of portfolios?
TAO has a dedicated module for measuring performance attribution which allows us to quantify relative outperformance for all securities in our entire global trading book. This module can be filtered to view performance for a specific client and allows us to drill down into a single security, market, sector, and portfolio.
Through this performance attribution module we get a lot more than just metrics of our relative outperformance. This module attempts to provide a comprehensive picture to help qualify our performance. It provides a granular breakdown of market factors that we were able to leverage for excess performance and transparently lays out any missed opportunities. Our client executives and relationship managers also have access to TAO Trends, which is a version of TAO that pulls in large data sets of historical information and presents visuals to understand trends, averages and ranking over longer periods of time.
TAO Trends also tracks performance benchmarking for some of our portfolios that trade as an exclusive. TAO Trends is also used during performance reviews to provide rich performance attribution analysis at an individual client portfolio level.
In conclusion, TAO has successfully become Citi’s competitive advantage and has been one of the drivers of growth for our business. We have a significant head start in this venture and continue to invest more in building new iterations of this product.
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