By Richard Coulstock, Head of Dealing, Eastspring Investments Singapore.
Last year I wrote an article for this publication entitled “Evolving into a Multi-Asset World”. That piece looked at this industry from a fairly high level, talking about how dealing desks initially came into being and the processes they have gone through over time. It focused on the evolution of the equity trading desk and how other asset classes may follow that model as they begin their own evolutionary path.
Historically, fixed income trading has long been embedded within the fixed income fund management team rather than on a multi-asset desk, but that is changing. This article focuses more on the impact within an asset management company, and in particular to the management of counterparty relationships.
Evolution is a slow process; there has been no “big bang” over the last 12 months. Instead, a slow adjustment has been happening. Trade magazines are including more multi-asset articles, industry conference are including more multi-asset discussions and vendors are moving further into the multi-asset space with regards to execution management systems and execution analytics.
There can be many drivers that encourage movement towards a multi-asset trading desk. In short, the drive is there to see a consolidation of practices, systems and measurement across asset classes and equities seem to be the model to follow. I have seen this described as the “equitisation of foreign exchange and fixed income”.
The development of multi-asset desks requires changes in how institutional dealing desks manage themselves and their counterparty relationships. Equity dealers are used to a world of change, a world of measurement, a world of being beaten up by compliance departments faced with ever greater regulatory scrutiny. This is increasingly happening in the more mysterious and less transparent markets of foreign exchange and fixed income. For buy-side desks this will have consequences. Are dealers adequately trained and do they have the necessary tools on their desktops?
Learning new skills
Managers of a certain size and profile will be fortunate enough to have senior, experienced dealers in each asset class. However, not every manager will have that luxury.
For other managers it may be that equity dealers are taking on fixed income trading roles from portfolio managers, in which case new skills will have to be learned. Trading a bond or currency is very different from trading an equity. For existing bond dealers moving to a multi-asset desk, again new skills will be required as they move to a more equity-style mentality in terms of trading electronically and having performance more closely scrutinised.
Dealing teams will need to evaluate their systems. Is their execution management system multi-asset? Do they need to introduce electronic trading systems into the forex and bond trading workflows? How do they measure their execution performance? Do current workflows need to be revised and will they stand up to close examination from clients, compliance departments and auditors? The list of questions goes on, and not all have immediate answers.
On the plus side, the increasing use of electronic platforms in the non-equity space should make it easier to train dealers in the execution of different asset classes.
On the electronic side, there can be some concern about the number of platforms a team may need on their desktops to electronically trade across asset classes. However, increasingly order and execution management systems are embedding such tools into their blotters, making the process far more efficient and helping towards the cross-asset class trading potential for buy-side dealers. In addition to the likely efficiencies and training opportunities, increased electronic trading may have one other advantage for multi-asset desks.
Broker relationships
That advantage may lie in overall management of broker relationships, a particular area of focus here within Eastspring Investments. If we consider just one brokerage on the equity side we will have senior touchpoints in cash, program and electronic trading. Add onto that facilitation and perhaps a regional Head of Execution and three or four senior sales traders across Asia and you quickly come to nine important contacts with just one counterparty. In just one asset class. Multiply that by the number of equity brokers you use, then add on execution only partners, vendors and TCA vendors and the number of potential meetings over a year is astonishing. That is before you look at non-equity relationships. It is possible in the long term that we could have one electronic touchpoint covering all asset classes.
Compounding the problem of multiple touchpoints with each counterparty is that brokers tend to be highly siloed across asset classes, which can be problematic in terms of conducting multi-asset trading reviews.
Breaking through these silos is a challenge, but perhaps on that increased electronic trading can help alleviate.
In summary, asset managers will need to seriously think about how they conduct reviews and arrange meeting schedules with each counterparty to ensure diaries are not flooded with repetitive meetings adding little value. The focus will need to be on quality, not quantity.
Finally, all this should follow a simple philosophy aimed at producing the best results for our clients and the continued development of the individuals and overall dealing team. In both cases we want to increase trading autonomy and improve performance against agreed benchmarks, raising the profile of the desk within the company and the wider investment industry.
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Ongoing Evolution Of Multi-Asset Technology
