Traders
We have strengthened our multi-asset model, as now we are trading equities, bonds, foreign-exchange and listed futures on one single desk. That’s one thing.
Second, maybe a more interesting aspect of our capacity to react is that we have adapted our trading tactics. For example, we have tried talking to our PMs, to identify those who are of high conviction on a market and others that have a bit less conviction. For people who have high conviction, they have a very short view on the market and a strong idea of where the markets will go, so we have to focus our efforts on trading immediately; to try to find liquidity for the full size of the order.
But we have also identified clients that have a longer view on the market and they’re happy to leave us more flexibility, to work on their orders carefully. The effort of traders to understand clients’ needs is an answer to our new constraints.
In bonds the traditional model we use is a Request For Quote (RFQ) which means you get the order done at a price for the full size. Today, some of the PMs in bonds are happy to trade a portion of the order at one price and then to have a dialogue with traders for the order balance. Finally is an increasing use of Transaction Cost Analysis (TCA). All of these tools that we use to measure transaction costs are used to improve performance and improve our knowledge of clients. TCA has been much debated in equities, now is getting more momentum in fixed income and foreign exchange. All of these asset classes are now converging with equities in terms of post-trade analysis.
New tools
I faced a difficult situation recently while looking at my TCA reports. They showed a very small percentage of our European credit volume in a new MTF. I was surprised by the low number so I was trying to analyse the situation.
One of the reasons for our difficulty is simply technology. The tools we use today are not adapted to getting an efficient completion in this MTF. For example, if I want to be an aggressive liquidity taker in a market in bonds, if I have a one million nominal trade in a particular instrument and I’m seeing a firm offer on a trading platform coming from an MTF, but this offer is only for 300,000 Euros, I will not be able to lift that 300,000 and then manage the rest another way. That’s a problem. A further issue today is we cannot get full visibility of the MTF order book in our system, we have to either manually connect to a web site or rely on the broker’s team behind the MTF front-end over the phone.
This market has not been organised to fit the way we should work orders. It’s an OTC market, so it’s organised around OTC. OTC trading is crucial in fixed-income as there are many more instruments than in equities and we absolutely need market-makers in bonds. However, in certain circumstances, we need more flexibility in the secondary market and the current tools in the market today are not completely available to help buy-side trading desks navigate between MTFs and OTC efficiently.
I’ve been working with my IT team to find a way to split our order and lift or hit a bid-offer in the market for a portion of an order, and then to manage the rest with a market maker. There are still many things to develop in OMS-EMS technology today to fit this new paradigm that is emerging in bonds. You may argue that I can pick-up my phone and leave a full-size order with a broker or a maket maker and let them work the order. But I have to gain flexibility and add new bond tools, because there’s no way I will trade everything over the phone.
Now, we want to keep STP working very efficiently from equities to fixed income – cash & derivatives – and foreign exchange.
OMS-EMS technology
I’ve seen a lot of innovation and sophistication in the functionalities that are now available to the buy-side. For example, we have a decent range of tools to manage equities, but I think third party vendors or probably the industry as a whole are focused too much on this asset class where the available tools are very mature.
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I have many requests from my traders to get specific algos on our desk or particular direct access to electronic crossing networks etc. I try to limit this because I think we should get more things done in other asset classes. We have to work more on developing foreign exchange, especially our capacity to improve our transaction transparency in this asset class, and to get some important functionality in bonds that we don’t have today, instead of getting more sophisticated in equities. We have also to focus our system on its main functionalities to minimise the risk of big IT bugs. If your OMS crashes half an hour prior to the closing time it is a big problem.
It’s a matter of balance. You have to balance your technology across asset classes and not to allocate your full resources to cash equities at the expense of bonds, foreign exchange and derivatives.
