FACING EVOLUTIONARY CHALLENGES.
Rishi Nangalia, Global Head of Exchange Traded Instruments (ETI) Trading at Thomson Reuters, talks to Best Execution about the need for a modular approach into today’s evolving trading technologies eco-system and the ongoing effort to provide leading Execution Management System (EMS) capabilities from REDI, integrated in its flagship desktop, Thomson Reuters Eikon.
There has been a lot of talk about fund managers moving to multi-asset and cross-asset trading, how do you see this being implemented and developing?
The distinction between multi-asset and cross-asset class trading is an important one. A single system, supporting many asset classes, does not mean that those asset classes can be cross traded. Multi-asset class trading systems, supporting exchange-traded products, have existed for a very long time. In our system equities, options, futures co-exist in one system; the pieces that are separate are FX and fixed income, which have always had different systems and market microstructures.
The convergence has begun especially with the growing move towards electronic trading. It is not the exchange-traded business going multi-asset that is driving this new wave of convergence, it is the fact that participants want to trade exchange-traded products, FX, and OTC products, using the same workflow and the same ‘infrastructure’. It doesn’t mean the same trader will be trading all the asset classes. It simply means that the buyside want to consolidate their systems and finally, as fixed income can, to some degree, go electronic, they want it to be on similar systems, using similar vendors, if possible. It is cheaper and more efficient for them to support fewer systems and eventually build cross asset functionality; things that already exist in REDI for exchange traded instruments.
You need good multi-asset trading before you can go cross-asset, and some of the processes only exist where the asset classes have the same trading style and can rely on the same infrastructure. Cross-asset trading is now starting to develop and while systems like ours achieve this synthetically, users are now wanting cross-asset trading in an automated fashion.
What are the drivers pushing for a combined OMS/EMS and how do you see this developing?
There has been a lot of discussion about the convergence of OMS and EMS for a long time, but no real examples exist today. A couple of companies that own EMSs and OMSs have delivered them as a single vendor but there is not a single company that has delivered a truly combined OMS/EMS to date.
Our approach is to let the client decide and drive this convergence through efficient deployment and seamless workflows. We have an open platform approach; and we have integrated with most vendors and are now building on that with the platform strategy. The idea is to deploy vendors’ software, and let the client choose to have a single experience, but it doesn’t mean it is one product. The client can choose a modern OMS or EMS and expect the same data sources and for systems to interact with each other in a seamless manner. We are trying to solve the problem a little more exponentially, rather than trying to create some new “do-everything” product.
The underlying driver is the desire for a single vendor, a single support structure and a single deployment and data model, but if participants can solve these practical problems, they would realise there is very little reason to have a single product that does it all. We know that monolithic products, that claim to do it all, have many issues and so we are moving away from a world of monolithic products to a world of modular products that the client puts together.
What has been the greatest challenge in developing these systems?
Different asset classes have different market structures and clients have very different needs, depending on client-type, and regional differences. Furthermore, our industry has a poor track record of collaboration. No single platform can do it all and no single company can be very good at every asset class, globally, for the entire lifecycle. You could be creating the lowest common denominator product and miss best-of-breed specialisation. For example, while OMSs can capture the terms and conditions of every complex asset class, they still need to trade each asset very differently and there is not one system that can handle the different execution styles.
An eco-system can be created by using modules and partners that provide different pieces, where clients can put together a unique solution as client needs evolve.
What functionality is the buyside looking for today?
The buyside industry is under pressure to generate returns over and above the standard benchmarks with fewer people and more regulation, all of which is driving the demand for greater electronification and cost efficiencies.
Data and analytics are becoming more in demand, across asset classes, particularly in Europe with the imminent introduction of MiFID II. It is not only in TCA, buyside participants now want a common repository of what they have traded, how they traded and how well they traded. They are looking for performance statistics, real time monitoring, and pre-trade, during-trade and post-trade analytics, end-to-end, across asset classes – if you can’t measure it, you can’t improve it. Our focus is on building real-time performance monitoring as well as comparing historical and current performance. The value of this kind of analysis, across the asset classes, is growing.
What developments and additional challenges lie ahead in this space?
The biggest challenge for the buyside is paying for innovation and technical development. Although some of the very large firms have built their own technology, typically the buyside relies upon vendors and the sellside, and for them to adopt multi-asset or MiFID II requirements or to improve their workflow, they need someone else to drive the development. If the buyside is not willing to pay for it explicitly, they are at the mercy of the vendors who will do it at their own speed. And to add, their business models are under pressure with the move from active to passive management.
The added complication is many vendors don’t get paid by the buyside alone, but rely on commercial models that get paid through various other arrangements. There is a very interesting challenge brewing around who funds this evolution, with the vendors looking to grow, the buyside looking to cut costs, the sellside paying for it but not wanting to, and then MiFID II presents new rules around inducements and payments, and that further adds to this complexity of commercials. This is going to be one of the biggest issue going forward for innovation and development in our space.