In recent years, Nordic asset managers have demonstrated an increased focus on and responsibility for the quality of their executions. Even as recently as a few years ago, buy-side trading desks were viewed as cost centers, but now they are significantly upgrading their technology and attracting top tier traders. Rather than handing off orders to the sell-side to execute as they see fit, Nordic buy-side traders are ensuring that sell-side execution strategies meet their specific trading and order routing criteria.
Risk Management
The depth of trading functionality at many Nordic asset managers is somewhat shallow. Legacy order managements systems, none of which were designed for electronic trading, remain deeply entrenched at most traditional buy-sides. Structural issues, including a lack of widespread FIX connectivity, also impeded electronic trading adoption. However, as market centers and brokers have modernized their services, Nordic buy-side firms are increasingly turning to advanced execution management platforms, and not simply for their trading capabilities. Many of our clients are just as concerned with their trading system’s ability to integrate with in-house and third-party analytics services. As a result, system flexibility and ease of integration are key requirements for firms who are deploying new trading solutions.
Nordic firms are also looking for vendors to provide a consultative approach to their service offerings, particularly when it comes to analytics and TCA. Firms want a range of services that will give them greater insights into their execution performance and the performance of their liquidity providers. Given the variety of TCA services available from brokers and independent providers, and the various ways that information is collected and distributed, the buy-side is often faced with an analytical landscape that is a fragmented as today’s global equity markets. As a result, they are turning to trading system vendors to help them normalize and aggregate various TCA service offerings and bring them directly into their blotters.
Custom-built vs. Off-the-shelf
The majority of Nordic asset managers rely on algorithms provided by leading brokers and broker dealers. Although a few Nordic buy-side firms, such as Pohjola, have taken algorithmic development in house, it is still a relatively rare practice. Increased development and use of alternative SOR’s and trading strategies will likely follow as firms deploy more sophisticated trading and analytics tools that provide granular information about order execution history.
Another reason that Nordic buy-side firms rely on execution strategies from the largest brokers is that the use of CSAs is not as common in the region as it is elsewhere. However, as the use of CSAs becomes more widespread in the Nordic countries, firms will route orders to additional liquidity providers and leverage a wider range of algorithmic strategies.
Multi-asset Trading
Among traditional asset managers, divisions between trading desks remain fairly distinct. Most institutional traders are comfortable hedging different asset classes for hedging purposes – for example, trading the cash underlying versus a listed derivative – but trading different asset classes independently as part of distinct trading strategies is uncommon at that level. At the hedge fund level, divisions are less distinct, particularly at funds that run cross-asset algorithmic trading strategies. But even at hedge funds, the number of traders actively trading multiple asset classes for separate alpha-generating strategies is low.
What we have seen, however, is a breakdown of technology silos as opposed to trading silos. At the asset management level, the true value of multi-asset trading is not necessarily the ability to execute multiple asset classes simultaneously; rather, it is an efficiency play. Having a single trading solution supporting multiple trading desks and asset classes greatly streamlines systems integration, internal support and development efforts. Some of these larger asset managers use multiple in-house risk management systems, OMS’s and data feeds. All these different applications have to be tied together, so providing a consistent interface for multiple desks is a major efficiency gain for these firms.
Effects of HFT on the Nordic Region
Most market participants view high frequency trading as beneficial to the development of Nordic market structure, given the increased liquidity and reduced spreads that high frequency traders bring. However, some traditional asset managers have expressed concern about more aggressive high frequency order flow and it’s impact on their execution quality. As a result, high frequency trading is something that they are starting to monitor more closely, both independently and with the assistance of their liquidity providers.
This is another example of how Nordic firms, much like their European and US counterparts, are taking greater responsibility for monitoring their execution performance. Regardless of where MiFID II takes us, high frequency trading is here to stay and the burden is on buy-side to effectively manage how they interact with this type of order flow.
Over the last few years there has been a marked increase in the availability of advanced trading strategies as well as a proliferation of liquidity venues in Europe and the Nordic region. As a result, Nordic firms are rapidly improving their technology solutions to address the challenges of an increasing complex trading environment.
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