Buy-Side Multi-Asset Trading: Challenges and Opportunities
For the buy side, multi-asset trading offers the promise of efficiencies, cost savings, and closer alignment with an increasingly interconnected global marketplace.
But how far do large investment firms wish to go to amalgamate legacy siloed trading desks? What is the blueprint? And most critically, what are the risks and rewards?
Those questions were among topics explored at a September buy-side roundtable in Boston, hosted by the GlobalTrading Journal and sponsored by TradingScreen.
As the buy-side universe is expansive, with an abundance of investment models and strategies, each journey toward multi-asset trading is unique. But there is one common denominator that’s vital in driving the process forward: the underlying technology.
“All of the consolidation and activity in the trading-technology space highlights the need for integrated workflows and increased automation across asset classes,” said Varghese Thomas, Chief Operating and Strategy Officer at TradingScreen. “Leveraging established and trusted technology partners are necessary to help bridge the gap between current solutions, fintech platforms as well as new emerging asset classes.”
At a TradingScreen-sponsored roundtable in New York in June, participants noted that the buy side was shifting to buying technology rather than building technology; interoperability of systems and ‘big data’ management were core challenges; and automation of processes, while a key ingredient in the evolution of a buy-side trading desk, has its limits.
The Boston discussion addressed the latter point.
“The reality is that not everything in multi-asset trading can be done programmatically — there will still be a need for human oversight,” said Joseph Bacchi, Head of Multi-Asset Trading and Investment Operations at Acadian Asset Management. “There isn’t one venue, one strategy, one platform or one relationship. That’s the foundation of multi-asset trading.”
Some senior traders and technologists who attended the roundtable event said they were there to gather market intelligence, i.e. assess industry trends and vet what an individual firm is doing versus what the broader marketplace is doing. In multi-asset trading in particular, there is ample opportunity to learn from earlier movers.
“Firms are at varying stages in the migration to a multi-asset class environment – some are just starting, some are fully multi-asset,” said Rob Hegarty, Managing Partner at Hegarty Group and roundtable moderator. “Others prefer to keep equity separate from fixed income and currency, at least for now.”
As drivers of the migration to multi-asset trading, Hegarty cited increasing cost pressures; opportunities for collaboration; the availability and ubiquity of data; the rise of quant resulting in cross-asset strategies; advancements in available technologies such as Execution Management Systems; and new asset classes such as cryptocurrency.
One roundtable participant noted that consolidation of trading technology across asset classes is a lengthy process, and there is the question of whether technological products are mature enough to support multiple trading scenarios.
This person said one approach to technology is to leverage vendor platforms to handle ‘plain vanilla’ tasks, which frees up traders to concentrate on higher-value, more strategic workflow.
Another participant agreed. Amid the evolution of high-touch and low-touch trading, “you need deep-level experts to deal with the more difficult order flow,” this person said. “There’s lots of easy-to-do stuff on every desk. The challenge for the team is how to siphon that out.”
One topic of interest was the recent flurry of mergers and acquisitions in the vendor space — State Street acquiring Charles River, SS&C acquiring Eze Software, and Ion acquiring Fidessa. The deals are in line with the overall theme of consolidation and reduction of technology footprint in the front and middle office.
“The buy side appears to be strongly in favor of the (M&A) strategy, as it should help them reduce costs,” Hegarty said.
Investment managers are closely watching the emergence of cryptocurrencies. Roundtable participants weren’t so much interested in whether the price of bitcoin will rise or fall, but they are very interested in whether crypto has staying power, and if so, how a firm can integrate it into a multi-asset trading framework.
One trading technologist said he believes cryptocurrency is for real, and his firm has set up a committee to study the asset class. “It rides some of the same rails we have today, but there are some new ones,” this person said. “Security is a huge deal and custodial aspects are monumental.”
“Once it gets up to speed you’ll see a lot of similarities to currency trading, and ETFs will be involved,” the participant continued. “But there are scary pieces and you really have to be very cognizant of how it works.”
Another person noted there are many new trading platforms, primarily in fixed income and cryptocurrency, but some of these are “pop-ups” that disappear as quickly as they appear. “There doesn’t seem to be much staying power,” this person said. ‘Who will be the winners? We can try to pick one but then we may find out later that the liquidity isn’t there.”
There is a need to standardise ESG data.
Solve Advisors says demand for data is growing as fixed income markets become more electronic.
The UK regulator said ETF primary markets are highly concentrated, particularly for fixed income.
System helps traders manage data agreements electronically.
Using machine learning in securities lending business enables greater pricing efficiency.