Multi-Asset Trading Means Cross-Asset Trading

Terry Flanagan

The term multi-asset trading connotes actively trading more than one asset class, but this doesn’t make it multi-asset, according to Peter Nabicht, senior adviser to Modern Markets Initiative, an advocacy group for high-frequency trading firms.

To truly be multi-asset, a firm must not only trade more than one asset, but there needs to be some crossover between asset classes.

“A lot of people look at it at a firm-wide level and say, ‘Oh they’re multi-asset class traders because they trade options and futures,’” said Nabicht. “But that’s different from having strategies which require trading across multiple asset classes.”

Nabicht will be speaking at Markets Media’s Chicago Trading & Investing Summit on Sept. 23.

He added, “I see multi-asset class trading as when you have one strategy where you’re managing the risk, the profit, and the code or the actual decision-making, across multi-asset classes.”

By this definition, many trading strategies today are multi-asset, although they may not be thought of as such. If, for example, an equity market making firm places a resting bid or offer in Microsoft, the firm will most likely look for a correlated trade with which to offset risk.

“You’re most likely looking at other equities, or maybe you’re looking at an ETF that they’re in,” Nabicht said. “If you’re looking at the ETF that they’re in, you might be looking at futures too, because the future on the index can beat the ETF. Even when you’re just placing orders from one asset class, there’s a very good chance you’re looking at other asset classes.”

From a systems and technology standpoint, multi-asset trading adds a layer of complexity. , It more than likely requires being connected to multiple venues and even using different brokers.

A multi-asset trading system needs to take into account the regulatory regimes governing the various asset classes. Risk management becomes more complicated. “Maybe you don’t want to have more than a certain amount of notional exposure,” Nabicht said. “That’s real easy to calculate when you’re trading one product. If you’re trading another product in another asset class with different valuation, now your notional exposure has to take into account two different asset classes.”

Proprietary trading that have systems that allow them to connect to multiple assets in very easy and efficient ways gain a competitive edge. “A multi-asset class trading system allows you to be faster to market with a new strategy or a strategy change, and it allows you to capitalize on those markets and make more money,” Nabicht said.

Featured image via tmc_photos/Dollar Photo Club

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