The way we trade has never been more complex. The current environment is overloaded with the demands of multi-asset, multi-broker, multi-exchange, multi-market and multi-national strategies. FTEN’s Ted Myerson rakes through the coals of the current financial turmoil and offers his perspective on the best model for success.
Sponsored access comes with a multitude of parts and complexities that all have their consequential risks. Inherent to this type of business are multiple prime broker relationships, various trading systems, competing liquidity destinations and different asset classes traded across diverse global markets. The constantly evolving financial environment, amplified by the viral instability of financial institutions, changes in regulations, and the globalization of trading, just seems to proliferate more of it— more relationships, more systems, more markets, more regulations and oversight requirements.
This environment has become fundamentally more chaotic and consequently a lot more riskier. The sum of all of these components can lead to compartmentalization and blind-spots without the proper tools in place to aggregate all of the pieces. This threat of organizational disorder presents significant risks for both the buy-side and sell-side.
Technology that aggregates and consolidates all of these disparate components can mitigate the friction and chaos, providing a singular view into all of this activity. Because of the different interests of these distinctive, and sometimes competitive, components technology is truly the only way to control the multitude of risks associated with sponsored access in this multi-faceted environment.
The Multi-Prime Brokerage Model
The market turmoil, over the last year, has accelerated the demise of the single prime brokerage model. Hedge funds – big and small – are increasingly moving towards establishing multiple custodial relationships in an effort to avoid the fallout from a bank failure.
The need for hedge funds to spread their assets over multiple prime brokers, juxtaposed with the multiple accounts and trading strategies involved in their businesses, results in a myriad of complexities. Without the proper infrastructure, hedge funds can experience a “silo” view of realized and unrealized profit and loss, overall position, and exposure.
This presents a new set of risk management challenges for buy-side clients.
At the foundation of this issue is the need to collect disparate position and transaction data across multiple prime relationships. Broker neutral, agnostic technology that processes drop copies from all trading destinations and prime brokers and rolls them up into one dashboard, can help alleviate the disjointed view. Since hedge fund administrators typically only view data after the market close, this roll-up must occur in real-time and throughout the trading day for there to be complete electronic control over position and exposure.
Mulitple Trading Systems
As buy-side clients spread their assets and risk over multiple prime brokers, the number of trading systems also increases, compounding the disparate sources of data and the threat of creating silos and blind spots. Consequently, the risks of these blind spots are compounded by all of the staff and resource cutting measures currently affecting the financial services industry. There are simply not enough screens or people to watch them in today’s market. This trend is expected to continue into the near future.
Trading desks need an agnostic platform to consolidate the total exposure of committed capital across clients and accounts into one real-time, intra-day dashboard view.
Multiple Asset Classes in Multiple Markets
Further complexities arise as electronic trading strategies begin to embrace global securities, options and futures. Since this is a significant and growing trend, consideration must be given to different currencies, time zones, regulations and taxes when considering risk exposure and overall positions.
Technology that can aggregate the impact of these inter-market issues and calculate their net effect on portfolio is tantamount to risk management in firms that include multiple assets and geographical markets in their trading strategies.
A Multitude of Risks – Multiple primes, multiple systems … is integrated technology the only solution?
