Despite the markets being shaken by COVID, inflation and the war in Ukraine, movements have never felt as extreme as during the Lehman crisis in 2007, said the first panel at TradeTech 2022.
Speaking under the Chatham House rule, which prevents reporting of direct quotes, Philip Allison, head of equities EMEA at Millennium Management, Eric Boess, global head of trading at Allianz Global Investors and Richard Parsons, the CEO of Instinet Europe, reported that the market’s resilience has been a real positive in an economic landscape that has had much bad news.
In part this is due to the diversity and range of market participants supporting liquidity in equity markets, which has moved away from the focus on large banks after the global financial crisis. That includes lessons learned by the market and imposed by regulators.
Operational risk has become more relevant, for example settlement in the Russian markets and interfirm risk management. That said, while ‘moving fast and breaking things’ might work for Silicon Valley firms, caution was advised when applying rapid change to the financial markets.
The second panel of the day examined the economics that are impacting investment portfolios and the potential investment responses to them.
Kevin Daly, senior economist at Goldman Sachs said, “War has dampened growth a little bit, but much more than that it has exacerbated and amplified the various inflationary forces we have seen even before the war took place. There has been a huge spike in commodity prices, oil prices up 20-30% and we also see it in gas, wheat prices.”
Jane Buchan, chief executive officer at US hedge fund, Martlet Asset Management, noted that North American investors were looking at a wider range of markets as a result.
“In the States we’ve had a really tough start to the year, our ten year bond market is down 10%, equity market is down double digits,” she said. “[There is] a small scale panic in institutional asset management, and so people are reassessing what is the role of commodities, as most people have very little commodity exposure, should they be more diversified, more overseas?”
Dirk Schumacher, managing director and head of European macro research, at Natixis observed that central bank activity will be key as policy needs to find a balance before markets can take a position, and factors such as decarbonisation can directly impact interest rates.
As a result he said, “We have to think very hard about where is the new equilibrium for interest rates? That depends on productivity growth, but from a market perspective what is an interest rate level that the global economy can live with, where inflation is a target? That is very difficult.”
Translating this into strategic thinking for the buy-side trading desk were Cathy Gibson, global head of trading at Ninety One, Jason Lenzo, global head of trading at Russell Investments and Matthew McLoughlin head of trading, and partner at Liontrust.
McLoughlin led by emphasising the key focus for traders – the end client – and how to further their investment objectives, by engaging with multiple sources of liquidity provision from high touch trading to electronic trading and traditional banks to electronic liquidity providers.
“The challenge for the buyside is, can we navigate that liquidity landscape and make the most out of all of those options for finding liquidity? We’re at TradeTech so it is about leveraging technology to differentiate liquidity options which are appropriate for each asset class quickly in the lifecycle of each order which is a challenge for us.”
Both Lenzo and Gibson noted that despite the importance of technology, trust in volatile markets was a vital and hard to replicate through a system.
“It’s about humans,” said Lenzo. “The counterparties that are dealing with you, that you trust and can have interactions with, that have a business model you understand so you know how they are generating revenue and what they are focused on, so you can have that trust that they will support you in their business.”
Gibson closed the session noting that, “Relationships are key. When you have an international crisis like Ukraine and Russia, having partners out there who you trust and they trust you is just fundamental and technology is never going to replace that.”