A MULTI-DIMENSIONAL APPROACH.
Fabien Orève, Global Head of Trading, Candriam Investors Group explains why trading desks need to be organised across the asset classes.
Fabien Orève has been Global Head of Trading at Candriam Investors Group in Brussels since December 2010. The evolution of his desk towards a highly-efficient business unit has won awards for excellence in buyside trading. Prior to joining Candriam, Orève was a programme sales-trader at CA Cheuvreux in Paris. He graduated from Université de Caen Normandie, France, with a Master’s Degree in Banking & Financial markets.
How has the plethora of regulation changed the industry and what do you foresee as the challenge post implementation of these new rules?
Whether it is EMIR (European Market Infrastructure Regulation) or MiFID or any of the other post financial crisis legislation, the common focus has been on improving transparency as well as the different aspects of the business such as trading or execution. Looking at MiFID II in particular, the main impacts are twofold – the unbundling of research away from execution and the obligation for both the buy and sellside to report trades and transactions. That has been a big change for all of us and we will have to continue to invest in systems such as our OEMS (order and execution management system), enhance our qualitative and quantitative historical database and review our existing FIX connections to make sure all necessary information is transmitted to platforms and brokers.
Another change we are seeing, and expect to continue to see, is an increase in the number of questions that we are getting from existing and prospective clients on how we manage execution as well as TCA (transaction cost analysis) across the asset classes. This has led Candriam to invest more time and money into developing a larger database across asset classes. Having a multi-asset class OEMS has helped this process because it consolidates the order flows in one place. For example, the information can be extracted for TCA to analyse the post trade transactions, but if you continue the exercise and analyse the data in greater detail, it can also be used internally to improve the trading desk performance and provide more information to senior portfolio managers. Having more “ex-post” TCA across all asset classes will greatly help “ex-ante” TCA or pre-trade analysis.
How has TCA changed in light of the advent of the multi-asset class trading desk and regulation?
MiFID II has triggered the need to have post-trade analysis across different asset classes and we are seeing more convergence between equities, fixed income and FX. It is also one of the consequences, and interesting trends, arising from the increase in the multi-asset trading desk. The result is that large third party TCA providers now have to offer decent TCA packages across the three asset classes – equities, fixed income and FX. This is not only because it saves time and streamlines the processes but it also allows firms to have one central place where the data can be monitored on a regular basis and in a systematic way for compliance and business purposes. The one exception has been in the derivatives space although work is being done on OTC as well as futures, and I think we could see them integrated into multi-asset class TCA packages by next year.
Multi-asset trading desks are a feature at many buyside firms, when did Candriam establish its desk?
We built our multi-asset trading desk more than six years ago and innovations such as the multi-asset OEMS made the process much easier and has allowed us to on-board different asset classes. We take a horizontal approach and have leveraged the economies of scale to focus on productivity and synergy. From an organisational point of view, there are some buyside firms who restrict horizontality to small orders (across all asset classes) thanks to their OEMS’s filtering capacity. Other firms work on orders without differentiating between order size or underlying asset class. However, I think that excessive trading desk horizontality could be frowned upon by the active portfolio managers who invest in asset classes requiring expert execution and the need for liquidity. At Candriam, we have divided our central desk into specialists and generalists because there are certain asset classes such as fixed income, particularly corporate bonds and emerging market debt, that are more complex or illiquid and need people that have the experience and can work the order flow.
Liquid asset classes such as equities and foreign exchange are better suited to generalists and electronic trading. For example, there is a lot of programme trading in equities and that often requires a quantitative style of trading. If there are some small and mid- cap names in the baskets we would not split the order into different pieces but keep it together because that is the most efficient way to trade. This does not mean that our generalists work alone, they actually work in concert with their most experienced colleagues.
We have talked about regulations but how has market conditions changed trading?
Over the past few years, we have been in a low interest rate environment that has triggered two trends – investors have been on the hunt for yield to find additional alpha and have increasingly looked for opportunities globally such as emerging markets in Asia, Latin America and Africa. In some cases though this has led to an increase in voice trading which is the reverse of the regulatory push towards electronic trading and greater transparency. This is because trading, for example, in high yield bonds or emerging market debt, requires more expertise and a conversation over the phone.
The other consequence of market conditions as well as regulations is that we have seen significant inflows into listed derivatives, for example futures, which is why I think it is important to have people who have an expertise in derivatives. To this end, we have made two hires over the past year to strengthen our multi-asset trading structure. The most recent were Vincent Minichetti who will not only cover derivatives but also cash equity, FX and derivatives, and Cyril Batkin who also covers fixed income, FX and derivatives.
How has technology changed the industry and what do you see as the new developments?
It has been an interesting evolution with our trading desk talking about high, medium and low touch trading. However, despite the technological progress with low touch, trading is still monitored by both sides, brokers and ourselves. You hardly hear talk about ‘no touch’ although I think there is the potential for this to happen with small orders or retail order flow. I can see in three to five years’ time, putting an order in the OEMS, setting the appropriate RFQ (request for quote) to find the best price and then automatically executing the order.
How has the relationship between the portfolio manager and trader changed?
What we have seen around us is trading desks build new teams on the execution consulting or advisory side who work with portfolio managers to work through certain liquidity issues that they may have. Portfolio managers are increasingly asking questions about liquidity and, irrespective of how the buyside trading desk is organised, traders can provide additional information and colour on how they see the liquidity changing and the best ways to access it.