Edward Wicks, global head of trading at Legal & General Investment Management (LGIM), gives a unique window into how he has built a successful trading desk for one of Europe’s largest asset managers, with AUM of over US$1.47trn and a global team of 35 traders worldwide.
At large asset managers, trading teams often play an incredibly important and varied role. Internally we are a key part of the investment process, supporting portfolio management teams to deliver a high level of performance for our clients. We also have a significant role to play externally, ensuring access to liquidity via our counterparty and technology relationships.
In my experience, there are many ingredients required to build an effective trading desk, and in this article, I will aim to touch on some of the most important ones.
Fostering a collaborative culture
We have derived many benefits from our emphasis on collaboration and at LGIM we don’t operate separate trading desks according to asset classes, with equity traders on one floor and fixed income traders on another. Instead, across all our investment hubs, we locate our traders together which provides a great opportunity to exchange knowledge and ideas.
As market structure and trading protocols continue to evolve, the ability to share our experiences across asset classes has positively impacted performance. For example, we have been able to use our deep knowledge of algorithmic trading in equity and listed derivatives markets to support colleagues in FX make a similar transition. More recently, we have been able to leverage our experience in ETF markets when it comes to evaluating and interacting with alternative liquidity providers. That has helped inform our approach when it comes to using these types of counterparties in other asset classes, whether that is in credit portfolio trading, or cash equity markets.
By physically locating our traders together, we are also able to benefit from high levels of cross training. This helps to give us greater depth of coverage in the trading team and ensures we are more resilient, whilst also potentially offering more varied career paths for our team.
When we think about collaboration, we must also consider it in a global context. With traders at LGIM located in Hong Kong, London, and Chicago it is vital we create an environment where the team is encouraged to interact and share knowledge across geographies. Obviously, technology can help with that to a degree, as we saw during the pandemic, through applications like MS Teams and Zoom. However, we have also found real value through the introduction of secondment programmes within trading, for shorter spells or extended periods. In our experience, having traders transfer from one region to another can bring significant benefits.
Creating efficiencies and leveraging the power of technology
Another important consideration for large asset managers is efficiency. Inevitably when you are dealing with a large amount of global trading activity from a varied group of portfolio managers there will be a segment of flow where there is little benefit to be found from human involvement. For example, low-value order flow can be fully automated to replicate a traders’ behaviour. One of the most important elements of automated ‘no touch’ workflows is setting the parameters correctly, to determine what is appropriate for automation and what requires greater trader involvement. It is also vital that the approach is flexible so that those parameters, or thresholds can be altered in line with prevailing market conditions.
If you can optimise the use of automation, then the trading desk is able to focus on more challenging activity. That may mean more time spent on primary markets, or less liquid secondary orders, as well as allocating more time to developing existing trading applications and workflows.
Diversity of thought and a progressive team approach
Given the nature of the role, to be effective, trading teams must appreciate the need to continually evolve and improve. It is why we place such value in a globally diverse trading team, with diversity of thought that leads to unique perspectives and an ability to challenge decisions. Whether we are evaluating and implementing best in class technology, ensuring our soft and technical skills keep developing, or considering the impact of legislation and regulation, having an eye on the future is incredibly important.
Although some of our trading technology is supplied by third parties, we devote a significant amount of time to engaging with vendors. This helps us customise and develop applications and electronic trading platforms to suit our changing needs and ensure trading outcomes remain at a high level.
Thinking progressively, it is vital to consider both the current and future regulatory landscape. We encourage traders to engage with relevant internal teams, as well as counterparties and industry bodies to help their understanding of potential developments and provide feedback. Currently we have several working groups assessing the likely impact of regulatory divergence, consolidated tapes, the introduction of T+1 in the US and the viability of tokenisation.
Leading on data
Much has been written about the importance of incorporating more data into the trading process, and with good reason. Technical skills such as proficiency in programming languages is clearly important, and we support individuals with more formal learning opportunities in this area. We are fortunate to have, embedded within the team, a Trading Research function. This allows us to utilise and benefit from quantitative inputs, without the need for every trader to be fully proficient in those skills. On a day-to-day basis, traders have access to a wide variety of data supplied by this group which helps inform their decision making. More recently, a small group of traders has worked closely with this team to develop a machine learning model to determine the most appropriate execution channel for a given order. This potentially has relevance across multiple asset classes, allowing us to refine further our trading process.
In recent years, markets have witnessed a number of global crises, periods of extreme volatility and significant regulatory change. Against this backdrop, the role of an effective trading desk is only likely to grow in importance.
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