Multi-Asset Class Trading Expands

Terry Flanagan

Multi-asset-class coverage is largely a given on institutional and prop trading desks, as with rare exception, large investment firms need to offer more than just stocks or bonds, and they need to trade across borders.

But the evolution of a multi-asset-class, global market structure is not seamless.  Currently, there are issues pertaining to the OTC market’s transition to electronic trading and central clearing, and in changing rules in different regulatory jurisdictions around the world.

“For market participants and regulators working in the new market structure there is a cost attached to getting things up and running, with various trading systems and compliance of new rules,” said Rajeev Ranjan, financial markets lead technical expert at the Federal Reserve Bank of Chicago.

Rajeev Ranjan, FRB of Chicago

Rajeev Ranjan, FRB of Chicago

“You have an opportunity where technology is a great enabler, and you can trade around the world,” said Matthew Haraburda, president of XR Trading LLC. “But at the same time you have greater scrutiny from numerous regulators, who are still figuring out how they will look at things. It is very challenging for the regulators to be aggressive but not be too aggressive, and provide guidance without opening the door to unintended consequences.”

Ranjan and Haraburda spoke on the ‘Future of Multi-Asset-Class Trading’ panel at Markets Media’s Sept. 23 Chicago Trading and Investing Summit.

XR focuses its risk-management efforts on technology and execution risk, and the Chicago-based prop-trading firm opts for established, ‘known-quantity’ markets over new markets that have yet to get their legs.

“There are a lot of venues to connect to, and with technology today we’re able to do that,” Haraburda said. “We prefer vibrant, automated markets, for example in Japan, versus newer markets where it’s a tremendous amount of work to connect and you’re not sure what’s going to be there at the end.”

Trading swaps on swap execution facilities or via swap futures holds potential appeal for prop traders, but most firms are waiting to see how liquidity develops.

“Trading of OTC products is new for the prop-trading community since the passage of Dodd-Frank. These are people who wouldn’t be involved in the OTC market,” Ranjan said. “But there is still a lot to do to get cleared swaps to trade.”

Matt Haraburda, XR Trading

Matt Haraburda, XR Trading

In a fragmented market with two dozen registered SEFs, one challenge will be collating and managing data. “There is a tremendous amount of data generated each day and the reporting requirements can be complex,” Ranjan said. “In addition, there is some uncertainty about who is supposed to report a trade, and to which swap repository or clearing firm.”

Ranjan noted that there are about 100 different data feeds for interest-rate swaps alone, and another 20 to 25 for credit-default swaps. “You don’t have the kind of standardization you have in the futures markets, so you will encounter issues with data,” Ranjan said. “Hopefully, we can get past the stage of data formatting and standardization and data-reporting rules and requirements…Once we figure that out, it will be useful post-trade.”

Technology vendors are scrambling to develop and market products to address market participants’ challenges in the evolving multi-asset-class market structure. For his part, Ranjan has yet to see a ‘category killer’ in the form of a robust, enterprise-wide risk management system.

“There’s an opportunity for someone to create such a system,” he said.

Featured image via freshidea/Dollar Photo Club

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