THE MULTI-ASSET CLASS ROADMAP.
Peter Barker explores the twists and turns in adopting to this different way of trading.
In a time of tighter regulations, escalating costs and prolonged low interest rates, institutional investors are searching for alpha and broadening their asset class horizons. This has led trading desks to restructure both their operational as well as technological structures to facilitate this wider remit.
Institutions though are not just adopting a multi-asset class view but also venturing deeper into specific asset classes to generate greater returns. Fixed income is a case in point with investors heading down the credit spectrum. “We are definitely seeing a growth in more traditional asset managers getting more diversified,” says Gareth Coltman, European product manager of MarketAxess, a fixed income platform. “Emerging market credit has been a growing area both for us and generally; and high yields, and crossover debt are also becoming popular.”
It is also a less expensive way to trade. Matteo Cassina, global head of sales, products and platforms at Saxo Bank, notes as market structures converge, trading firms prefer to interact with businesses that allow them to trade global markets and multiple asset classes seamlessly, from a single account. “Financial Institutions have been overwhelmed by the cost and complexity involved in interacting with organisations which operate siloes for each asset class,” he adds. “Being able to interact with a business that enables them to trade across asset classes and global markets significantly reduces such complexity.”
Brian Collings, CEO at Torstone Technology, a provider of securities and derivatives processing software to the global financial markets, adds. “Regulation is turning the whole industry upside down and literally back to front. Firms are using the back office to consolidate for regulatory purposes as well as for client reporting. People can do that much quicker in the back office than potentially changing all of their front office systems to a multi-asset trading system.”
Collings believes that the challenges are far greater on the front office because “for the individual trading desks, a multi-asset trading system has to be as sophisticated as the specialised systems it is replacing. Multi-asset trading systems will get there but they require further development before they can compete effectively with all the specialist individual asset class products.”
Changes are afoot, though. Alex Foster, global head of strategy and business development at BT Financial Technology, notes that traders are breaking down those barriers. “Now we have definitely seen a coming together and technology has mitigated some of those risks coming out of silos. When you look at some of the products from the management community around pensions you are starting to see more multi-asset type products. It is a consequence of two things – a demand for funds for multi-asset and the driver of legislation.”
BT has a private cloud that not only offers buyside clients the necessary inherent security, but also the ability to access services and products across the asset classes as well as the trading lifecycle from pre- to post-trade, according to Foster.
To build or outsource
Not surprisingly, these changes require a different technological roadmap. “It looks like clients are trying to rationalise their own order management/execution management systems structure for asset classes – their connectivity, fixed connectivity and network security,” says Coltman. “At the more advanced end of the spectrum, clients who built equities smart-order routing capabilities are now looking to see if they can leverage those to access credits and rates markets, for example. My opinion is that the drive for this multi-asset trading is a cost rather than a strategy driver.”
Cassina points out that most broker platforms/trading desks were set up along asset class lines and order management systems tended to mirror this. He also notes that it is currently difficult for banks with legacy trading silos to create OMSs which can be used across all asset classes. “While this is unlikely to change overnight, demand for a simpler trading experience (for institutional investors) will eventually lead to a consolidation of order management systems towards a single multi-asset offering.”
He adds: “These considerations are part of bigger questions that brokers are currently grappling with – ‘do I keep building trading technology, or do I simply outsource and offer my clients a simpler multi-asset trading experience?’ If ten years ago the argument was to build rather than buy, today, with pressure to focus on core businesses, most banks will choose the outsourcing route.”
The buyside challenge
The buyside has its own technological issues. “It’s a lot of working with vendors and working with technology because the market is almost always ahead of the technology,” says Mike Nappi, senior trader, diversified fixed Income at Eaton Vance. “There is always something the market is going to introduce which is going to be a curve ball.”
He notes, “You have the buyside, which continues to grow, that is spread across probably a dozen OMSs and trying to get all these trading systems to talk to all these OMSs is a bit of a challenge. So for the market to trade efficiently you would like to see more homogeneous solutions – I liken it to different auto manufacturers. You can’t take a part out of a BMW and put it into a Ford. It’s the same sort of effect.
Nappis’s colleague Tom Luster, co-director for diversified fixed income investments said there were various drivers for an increase in multi-asset trading. “Regulation in a very general sense is affecting how we trade. Most of that is probably indirect – it is changing the nature and profile of our counterparties causing us to adapt. The other big driver is the development of new products that change the way we approach markets and trade.”
He notes that “our multi-sector product is farther out on the risk spectrum than most of what we do here. It is, coming from a volatility standpoint, pretty close to US high yield, which is not too far away from equities.”
However, Luster does issue a warning: “As the bonds get more interesting from an analytical standpoint it would seem that the operational complexity increases by a factor of ten. There is a much greater operational burden than I was expecting.”