Gill Wadsworth assesses the progress being made, the gaps and the costs needed to be addressed.
Multi-asset trading desks have become central to the buy side’s pursuit of outperformance in an increasingly cost-conscious and heavily regulated environment.
Providing dedicated trading desks for individual asset classes is costly, while switching to a single desk that oversees trading across the operation brings efficiency and centralised oversight.
“There’s not only a focus on multi asset consolidation in the front office, but also in the middle office and in the post trade world,” says Vijay Mayadas, president of capital markets at Broadridge. “Clients are looking for a single technology stack that is highly modular and based on a common data architecture.”
Yet while such arrangements may be optimum, some organisations are still playing catch up when it comes to implementing the necessary technology to support a multi-asset desk.
Technology stagnation
Automation is key to a successful multi-asset trading desk, but some firms are dealing with legacy technology stacks that are more than two decades old.
There are significant challenges in trying to integrate the old with the new, notably bringing order management systems (OMS) up to pace with their portfolio management system (PMS) counterparts.
Different asset classes have different workflows when it comes to order and trade management, and historically third-party vendors have evolved to focus on offering best-of-breed in a specific asset class.
At the same time, different clients often trade via different systems, so a bank has to be able to offer a full suite of platforms, which often service a single asset class. This has resulted in sell-side firms, in particular larger banks, having to manage multiple systems across multiple asset classes. This creates over-lapping software and higher costs for firms.
Ovidiu Campean, director and head of product management at Tora, says, “The PMS and the OMS evolved differently. The PMS were almost multi-asset from the get-go because they needed to show positions and P&L values for the portfolio and had to handle all the asset classes for these multi asset trading firms. The OMS were equity only at the beginning.”
However, Campean adds that there is a move to “provide unified and seamless user experience across all asset classes.
“We are providing services through unified user interfaces and application programming interfaces or APIs, that facilitate automation, which is key for the level of sophistication of these multi asset classes and multi asset desks,” he says
Reena Raichura, director, head of product solutions at desktop integration platform Glue42, warns that the “road to transformation would become harder the longer technology stagnation continues” adding there would be a direct impact on the business in terms of remaining competitive.”
She believes companies need to “embrace their legacy technology stack and adopt simple workflow solutions.
Raichura adds: “You can implement them within days and provide the quickest path to business value and then build from there.”
Removing silos
Integration is, according to Mayadas, a critical factor in moving to a multi-asset trading desk, yet slow progress is being made in removing silos.
A 2022 Broadridge survey of 58 sell side firms looked at their approaches to collapsing silos, motivations for doing so and the progress made to date. It found the front-office and trading desks remain the least integrated functions for the sell-side. Just 9% of respondents reported full integration of trading desks and 16% full integration of front-office technology
Mayadas notes that for broker-dealers, collapsing the traditional silos across asset classes, geographies and internal functions can be “an effective way to create trading workflow efficiencies and simplify the process of meeting exacting regulatory demands”. But, while the end point of integration is clear, the path can be extremely complex to navigate.
Siloed data sets make it difficult for portfolio managers and traders to access quality and relevant data, making it hard for to get a holistic view of a portfolio’s contents and its associated hedges.
Raichura at Glue42 says poor decisions based upon missing vital information can have a direct effect on fund alpha.
She recommends firms with in-house development teams “stop working in application development silos. Think about workflows and business processes first and then build an ecosystem around these”. She adds: “No application is an island.”
Consolidation can – according to the Broadridge research – result in “significant savings to overall technology spend”.
Over half of respondents to the consultant’s sought to bring their technology costs down by more than 11% as a result of the consolidation programme. Typically, the smaller the firm, the higher the cost reduction targeted with tier 1 banks generally targeting cost reduction of 10% or less.
All respondents that were targeting a technology cost reduction of 10% or lower said that they had achieved that goal. As the cost reduction target increased, the success rate lowered significantly with just one firm reporting a successful cost reduction of more than 20%.
However, even a 10% cost reduction can result in significant savings. Tier 1, 2 and 3 banks generally reported annual budgets of over $5m in all the front-, middle- and back-offices.
Broadridge report finds that reducing spending on this scale by 10% can result in significant overall cost savings.
Plugging the gaps
While significant progress is being made in the pursuit of a best of breed multi-asset trading desk, gaps still exist.
“There are gaps in terms of creating a simple, consistent set of workflows, “ says Mayadas “A lot of the issue is around behavioural change. If you’re trying to streamline your trading platform across multiple assets, you will have a set of folks who are used to doing things in a certain way. Being able to showcase a new set of workflows that doesn’t drive angst around behavioural change across asset classes is a gap in the market we are trying to fill.”
Campean adds that while there have been notable technological advances in “unified interfaces” for trading desks, “we still need to adapt all the functionalities to the different assets’ parameters, compliance or risk controls, allocations and rebalancing models. These indicators are impacted by all these particularities throughout the breadth of asset classes.”
The direction of travel for trading desks is towards the multi-asset approach, but there will – Mayadas says – be the need for distinct specialism at an individual asset class level, particularly in the front office.
“When I think about equities and fixed income, the market structure which is still RFQ based and there is still a lot of voice trading, I’m not seeing that those asset classes converge, at least in the front office and in the near term.
“The reason why they probably won’t converge that quickly in the front office is because the behavioural dynamics and market structure dynamics are different now. But as these become more automated, they may catch up to the post-trade world.”
