Future possibilities

Peter van Wely, head of InfoReach EMEA and Asia, dusts off the crystal ball to divine what the buyside trading desk of the future might look like and suggests it will have to handle more than just equities.

Now the credit crunch crisis is mostly behind us, and businesses are looking forward again, it’s a good time to take a look at what the near future has in store for the trading desk.

A trend that has gathered pace is a more demanding, efficient and result-oriented buyside trading desk that is acting more independently and with greater self-confidence. What are the drivers and what are the instruments one can use?

The crisis certainly played a part in forcing a look at costs, but resulted mainly in consolidation and the popping up of boutique firms among the sellside, and more demanding and critical investors. The other drivers are the increased globalisation of order flows and assets, increased interconnection and correlation between asset classes and investments, the development of new technology and of course the impact of regulatory changes like EMIR/MiFID I, and now II, and Dodd-Frank.

Looking too far into the future is risky, so I’d like to look at some examples and ideas about how one can take advantage of the above trends and developments in the near to medium term.

First, there is a lot of talk of multi- or cross-asset desks. While I don’t think this will apply to the sellside, it certainly is a trend that is just beginning with the buyside. This has to do with the increased correlation between different asset classes, greater use of derivatives and better efficiency. Key to this is faster and smarter communication between the traders, which will have a far more influential role than in the past.

Second is the need to be able to prove execution quality to your investors and to monitor the sellside. Ultimately this means the buyside will have to have its own TCA tools, and not just pre- and post-trade, but also at-trade or real-time. Other decision-making and analytical tools will also become more important if you want to be that savvy independent buyside desk. Think of risk control tools in your front-office, heat maps to see where and how you are trading, lightning fast aggregation and dissemination of data. This then needs to interact flawlessly with your market data and graphs to enable both a real-time, top-level view and a drill-down view of your trading. And of course seeing real-time visualisations of how you are trading against your set benchmarks.

The last important factor is technology and the cost of technology. The last few years have seen a maturing of technology but also of the technology know-how in buyside dealing rooms. Where in the past the buyside was dependent for this on the sellside, I have seen a remarkable shift which started at the hedge funds. However, this is not universal, and without wishing to offend, at certain firms, especially asset-managers and pension funds, I still see a lack of knowledge of trading technology and algorithmic trading. A fair number are still completely dependent, in all regards, on the sellside and have multiple trading systems which really have a negative impact on their efficiency and transparency. Nowadays trading technology is much more scalable, flexible and easier to implement than before – as well as being cheaper. Having good and flexible trading technology combined with some knowledge, rather than killer contracts, goes a long way to having a cheaper, more flexible and independent buyside trading desk.

So how does this translate to your trading desk?

Let’s start with the human factor. The desk of the future will be more multi-asset and integrated. You will need much faster and smarter communications between your traders. They will need to specialise and be able to multi-task. They need to monitor and co-ordinate the broker relationships in a flexible and synchronous way. They need to ask “When do I trade high-touch?” and “when do I trade low-touch?” And “does my broker have the good high-touch guys?” They need to have some understanding about the technology and reassess their execution management systems (EMS) regularly. A possible change will be the complete unbundling between research and commissions. A lot of buyside firms take an EMS for example because it is “free” (which means paid for by the broker), but they do not look at this critically and separate costs from the inflexibility and dependence that comes with it. I think that will change. A good trader with independent tools will make a difference and can make higher returns for his clients.

What does the trader want on his desk to help him succeed? For one thing he (or she) wants a system that has a very scalable architecture and is truly configurable. Why? Because it has consistently to meet the traders’ specific needs and address changes in these needs. In addition it has to be able to simplify the workflow and integrate easily with other systems. You do not want to be totally dependent on one broker, neither do you want this with an EMS. A trading system needs to be able to deliver on the above trends and wishes such as multi-asset, TCA, transparency, decision-making and analytical tools, excellent and easy integration with brokers/MTFs and their algos. It also has to have an open application programming interface (API) where they can easily programme their own strategies and algos. On your desk your system should be able to monitor and implement a policy of minimising transaction costs, impact, and maximise performance (and prove it). A good real-time audit trail is very important in this regard.

Last but not least, trading among different venues across multiple assets – high-touch and low-touch – and automating as much as possible requires a total integration of your desk and real-time normalisation and aggregation of data in a visualised way. Otherwise you will lose track.

So, although some of the drivers described will hardly come as a shock, I would say that the combination of further best execution, increased interconnection and correlation of asset classes as well as the maturing and decreasing cost of technology will have the most effect on your desk in the near future. In order to service the increased transparency and insight being demanded by investors and management, you must re-assess your trading desk.

©BestExecution 2015