Trade Automation, One Asset Class at a Time

Terry Flanagan

As asset managers look to diversify their offerings, asset classes that were previously traded manually are becoming more automated, with foreign exchange and fixed income among the most prominent.

“The disparity between asset classes is becoming smaller,” said Scott DePetris, president and chief operating officer at trading-platform provider Portware. “FX has a fairly large percentage of the market that is now electronic, and automation has become more widely adopted over the last 2 to 3 years as a useful tool for trading FX. Fixed income is just catching up to where FX was probably six years ago. So fixed income is probably the last of the asset classes to adopt truly an electronic marketplace.”

The larger the number of assets involved in any given strategy, the harder it becomes to capture alpha. Transaction costs get higher because the more a firm trades, as a percentage of average daily volume in any asset class, the greater the impact when entering and exiting a trade.

A number of strategies can be portable from asset class to asset class or from geographic region to geographic region. “As assets under management have grown there has been a need to diversify the type of trading strategy, and that’s driving the geographic asset class diversification,” DePetris said.

There is also a new focus on real-time access to all trading across assets in order to manage firm-wide risk. “What has happened is a convergence of the trading desks in fixed income assets, futures, options, and equities, often times falling under one or two people instead of six or seven different heads of trading,” said DePetris.

Prior to the financial crisis, assets were managed in silos: fixed income trading desks were separate from equities, which in many cases were separate from futures and options trading desks.

“They used different systems to trade,” said DePetris. “They often had disparate units that may or may not have used separate OMSs, and from a consolidated risk perspective it was very difficult for them to have T+1 across all assets. Often times it was T plus X in these firms. It was very difficult for them to manage risk in real time.”

Regulatory tailwinds across the globe are driving firms to revamp technology to meet the challenges of real-time risk. Even where there aren’t mandatory regulations, the buy side is taking precautions to be compliance.

“What we see from our large, tier one buy-side firms is a very conservative approach to the regulatory world,” said DePetris. “Even if it’s not regulated, that audit trails need to be in existence for x, y, and z, so they’re putting technologies in place that will audit every piece of the investment life cycle.”

As trade automation continues across all asset classes, total cost of ownership will come down.

“When you have multiple systems internally it becomes burdensome to your technology staff, and it’s also very costly to either lease or buy those systems, or in some cases build them,” said DePetris. “With the newer technology you can trade all your assets under a single technology provider, so it takes fewer people to staff internally, fewer vendors that you’re dealing with, and in the end that’s all going to result in a lower cost of ownership.”

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