Buyside profile : Gianluca Minieri : The liquidity paradox

Gianluca Minieri, Deputy Global Head of Trading CEO of Amundi Intermediation UK and Ireland assesses the current trading landscape and how the industry and firm are navigating their way through.

Gianluca Minieri is the Deputy Global Head of Trading and the CEO of Amundi Intermediation UK and Ireland. Before joining Amundi, he was the Global Head of Trading at Pioneer investments and the CEO of Pioneer Investments – UK. Prior to joining Pioneer Investments, Minieri was the CEO and CIO of Monte Paschi Ireland Ltd. He also worked and was responsible for proprietary trading in Banca 121, Italy, where he previously held the role of Head of Risk Management. Before this, he served as a Consultant in Arthur Andersen. Minieri holds an MBA with the SAA Business School in Turin and a specialisation in Finance through The Pace University and the Manhattan Institute of Management of New York. Gianluca holds a first-class honours degree in Economics and Banking Sciences. He is also a Certified Public Accountant.

There are a number of reports on the dearth of liquidity in the market. Has it got worse?

I agree, there have been several articles about the dearth of liquidity. In my view the situation of liquidity today is a paradox. From a macro perspective, there has been an abundance of liquidity due to the accommodative monetary policy and ultra-low interest rate environment. It is different on the micro level (financial markets) where liquidity has significantly contracted because of the structural changes in the market. In general, I would say that the liquidity is more fragile and less resilient. There is a perception that, during normal market conditions it is fine, but it vanishes when you need it the most.

What are the key drivers?

There have been a few key drivers. One is that of the intervention of regulations, the most recent being MiFID II, which have impacted market makers such as banks who acted as shock absorbers and important sources of liquidity. This changed because of increased capital charges and ratios. The regulations have also created a battlefield where exchanges compete on price. Each of them is trying to create its own value proposition but this has led to increased fragmentation of liquidity across different asset classes and currencies. For example, in the US, there are 13 different exchanges, in addition to alternative platforms and dark pools.

There has also been a contraction and reduced profitability in the repo markets due to this ultra-low interest rate environment. A less profitable repo market translates into less liquidity in secondary markets, given that is the place where market makers refinance their long-term positions overnight.

The other driver is changing investment trends. While we are all happy with greater automation and electronification, we have seen a proliferation in quantitative strategies and passive investing such as exchange traded products and systematic trading. The problem is that these strategies are takers of liquidity and can become forced sellers when market conditions are volatile, exacerbating ordinary market downturns.

How can buyside trading desks respond to the challenges. What tools and skills do they need?

As with many functions, you need to have a strong infrastructure and ensure that leading edge technology is at the core of the trading system. You need the tools that can find liquidity efficiently and at a competitive price. This includes an integrated order and execution management system, connectivity to electronic platforms, direct market access, smart order routers, algos, etc.

As for skills, the technology does not diminish the need for human competencies. If you are a driver of the latest racing car, you need to be an even more experienced driver behind the wheel. In the same way, these new powerful and sophisticated systems require people who can manage technological complexity. When I first started, all I needed was a phone, but today you need people who can understand the vast quantities of data for pre and post trade analysis, to make price feeds and for execution. They also need to be able to carry out market intelligence and add value to the investment process. You should also not underestimate the importance of a rare skill – common sense.

Geopolitical tensions are rising. How have they impacted trading?

Geopolitical events have always impacted financial markets, but I think they affect some countries more than others. For example, Europe and US are more mature and are impacted less than emerging markets, which are more fragile and where geopolitical tensions can more easily lead to a deterioration in liquidity. That is why nowadays you need to be able to source liquidity from all available sources. However, relationships, even in these technological times, are also very important especially in stressed situations. We believe that maintaining several long-term, trusted relationships has helped us gather reliable liquidity insight and provide market intelligence to our portfolio managers so that they can make better-informed investment decisions.

How has the prolonged low interest rate environment changed investment?

Asset managers are looking to achieve a better return at a lower cost, and if you look at the strategies that we manage today, they are more sophisticated and encompass different asset classes and currencies. I think cost will continue to be a main motivator and we will continue to see more assets gather around passive products.

In general, how has the role of the fixed income buyside trader changed over the years? How has your role changed?

As a result of the trends mentioned, we are hiring more people on the desk that have a quantitative background, who understand algos but can also evaluate financial markets with a more fundamental approach. From my point of view, our role has completely changed because of the increased competition and sophisticated investment strategies. Liquidity has become a key factor when building the investment process and this has meant that our role is not just about pure execution but also advisory. They need people who can provide support, manage the pre and post trade analysis and understand the role that liquidity plays in the investment process.

What impact has MiFID II had on trading?

I think one of the consequences is that it has made principal trading more expensive for banks and as a result has reduced the ability for markets to absorb shocks. We have also seen traditional market makers being replaced by high frequency traders. I am one of their fiercest opponents because I see them as opportunistic. In my view, they might have the advantage in terms of market data but there is a gap in their fundamental analysis. This means when there is a fundamental shift in the market, their machines do not know what is going on and they pull out of the market which in turn reduces the level of liquidity and contributes to exacerbate market downturns.

Data has become a hot topic for every asset class. What role is it playing in fixed income and how is it contributing to better decision making?

Effectively managing data has become key. We have an entire data management division at Amundi but we are also hiring data scientists on our team in order to produce quantitative measurements that can prove the added value to the investment process, as well as execution, and our performance against benchmarks.

Looking ahead what do you see as the biggest challenges and opportunities?

Taking the challenges first, it is no surprise that we need to continue to maintain a trading infrastructure that is technologically up to speed with the requirements of today but that can also meet the complexities of the future. These are very capital intensive investments and I think small to medium sized asset managers will find it difficult to make the investments that are required. Large asset managers like us will have a competitive advantage given that we can leverage on our economies of scale and global reach.

As for the opportunities, I see the role of the larger asset manager, who has the proper technological infrastructure, changing from price taker to price maker. Asset managers in general are holders of large inventories of bonds and unlike banks do not have to re-finance their long maturity inventory every day in the overnight repo market. As a result, they are better placed to provide liquidity to each other. There are several new initiatives such as all-to-all trading protocols which will give buyside firms the confidence to trade with each other.

©Best Execution 2019

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