“I was hoping for a quiet year, but that doesn’t seem to be playing out.”
These were the words of Jatin Vara, managing director and co-head of global trading at BlackRock, when asked by Walt Lukken, President and CEO of FIA, what the opportunities and challenges around various asset classes were, at this year’s International Derivatives Expo (IDX) in London.
Vara highlighted a handful of trends that, against the backdrop of a recent banking crisis, he was keeping an eye on. Firstly, there is the redistribution of risk.
“I think that is important because the ecosystem, in terms of who can take risks, how they can deploy that risk, capital efficiencies and ratios, that’s coming under pressure,” Vara said. “And there’s alternative liquidity providers that are becoming much more prevalent in the marketplace.”
Vara said this had led to a “huge amount” of potential for the different products BlackRock trades across, as well as the different regions the firm operates in.
Market structure technology and data modernisation is another trend seeing rapid change, Vara said, especially in the bond markets over the last two or three years.
“I think broader advances in technology and data processing are allowing more sophistication in our trading processes.” BlackRock is adapting, Vara said, ensuring that the firm generates the capacity to handle that data windfall.
The third trend Vara singled out was a changing regulatory regime, whether that was Europe versus the UK or the US versus the wider European regime. “These changes have coincided with a very significant change in markets, with more spikes in volatility and higher interest rates,” Vara said. “There’s a lot more flex in that macro environment.”
Vara believes the Great Moderation, a period of relative calm, is coming to an end. “There is more dispersion, which coincides with the redistribution of risk and the modernisation of market structure technology, which has presented us with this washing machine of noise we need to work with,” Vara said.
Emerging markets, “my former playground”, Vara said, still lag in terms of the way their equity markets operate. “That is one area where I see a huge divergence in different protocols. If I look at how my Mexico trading desk operates versus Shanghai, they are microcosms of the trading world.” As such, BlackRock is ensuring it stays relevant under all the different regulatory and macro regimes, Vara added.
“Think about how the structure of inflation and interest rates have changed over the last few years. That is top of mind in terms of central bank policy,” Vara said.
He noted that many people in the industry had joined in an era of more than a decade in which interest rates have been either negative or zero.
“I think the world is less level than it used to be,” Vara said. “What is happening from a geopolitics perspective, from a supply side perspective, from a technology perspective, that is front and centre from a macro perspective. What does that all mean for the extraction of alpha?”
“We’ve got a huge beta franchise with our index flow, but we are also a pretty big active manager. So, how do we disentangle the macros, the headwinds that we see, alongside regulatory issues, a technology arms race?”
Vara said the firm must pivot towards this “melting pot” to ensure it is accessing the most relevant trends, making sure it is developing its tech and systems across the globe.
“There is a lot going on, and hopefully there is a broad conversation to be had in terms of what we need to do.”
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