Paul Lorentz

The firm confirmed that the move is set to expand its fixed income offering as investors continue to increase their exposure in the asset class and seek more sophisticated strategies.

Paul Lorentz, president and chief executive of Manulife IM, said: “With this acquisition, Manulife Investment Management is well-positioned to capitalise on the increased investor interest in alternative credit and accelerate the growth of our global business.

“We are excited to complete this strategic acquisition because of the tremendous opportunity to serve retail, retirement, and institutional investors more deeply and unlock growth for our clients.”

Read more: Manulife Investment Management to acquire alternative credit manager, CQS

The CQS brand, which Manulife has acquired in the deal will be aligned, where possible, with the firm’s, with the co-branded logo set to be Manulife as Manulife | CQS Investment Management.

Soraya Chabarek, chief executive called Manulife IM the ideal home for CQS, adding: “This step marks the start of an exciting new chapter for our clients, our colleagues, and our alternative credit platform. Together, we will open significant new opportunities for our clients, who will benefit from the scale and capital strength of our new parent.”

Chabarek is set to retain her role, with other senior partners Craig Scordellis (CIO), and Jason Walker (CIO ABS) also staying on and reporting to her.

The post Manulife completes CQS acquisition, expanding its fixed income offering appeared first on The TRADE.

For those of you that haven’t heard of it, RFM is a not-so-distant cousin of the request for quote protocol (RFQ). RFQ has cemented itself as a central method of execution in fixed income in recent years in light of the advent of electronic trading and the move away from bilateral voice trading and onto platforms.

RFM is a similar concept, also derived from a desire from investors to access as much available liquidity as possible to ensure order fills and achieve best execution. It too is a trading protocol used by traders to gauge interest from several dealers in the market at a time to achieve efficient execution of an instrument.

However, the key difference with RFM is that when using the protocol, a firm will ask for both the pay and receive price for an instrument. The bottom line being that it reduces market impact by showing two-way interest in a chosen instrument to hide a firm’s direction.

“As buy-side traders seek liquidity in larger size trades, the challenge to retain as much information as possible – while at the same time obtaining an executable price – can be difficult to navigate,” State Street Global Advisors’ head of fixed income trading, Sharon Ruffles, tells The TRADE. “As the fixed income market moves towards ever more electronification, RFM allows for price discovery with less information slippage.”

The two-way workflow is no new phenomenon to trading and is used in the execution of several other asset classes. Given the importance of market impact in fixed income, it therefore makes sense that the RFM protocol has seen a rise in popularity in the last year, particularly in the swaps markets, as a natural progression of the market alongside increased electronification. While not everybody is using it, it is growing.

As traders have increasingly begun to adopt algorithms in their execution workflows in fixed income, which are data hungry and protocol agnostic, this too has boosted the use of RFM.

According to fixed income platform provider Tradeweb, the trading protocol has grown from 19% in Q4 2022 in net risk terms, up to 34% in Q4 of last year. Looking specifically at G3 currencies [Euro, Dollar, Sterling] in the rates market, that growth story from 2022 to 2023 was from 17% to 32% – more than doubling in a year.

“Our functionality relies on dealer support for the liquidity to happen on the platform and dealer support really started to grow at the end of 2019,” Tradeweb’s head of European interest rate derivatives, Angus McDiarmid tells The TRADE. “It’s a growing interest for us on the euro government bond side. Whereas the government bond business has historically been very much an RFQ market.”

Market impact

When exploring why demand for this not-so-new protocol to the fixed income scene has soared in recent years, the same phrase is brought up every time: it reduces market impact.

“RFM was worth pushing for a larger in size trade to limit impact and limit dealers from being able to skew price based on knowing their direction,” explains McDiarmid.

Reducing market impact is central to the growth of RFM. One key client user group of the protocol is the hedge fund segment, and it goes without saying that hedge funds are some of the most impact conscious firms out there.

Many of these firms opt for two-way pricing to shroud their market direction and recent regulatory changes have driven a chunk of hedge fund flow that might’ve taken place bilaterally, on-platform. For example, thanks to Mifid and the push to broaden the scope of what should take place on venue, Sonia and Sofr swaps flow that might’ve previously taken place bilaterally now takes place on venue.

Tradeweb subsequently rolled out trading protocols for clients to engage with the Sofr alternative benchmark for US dollar derivatives and €STR for euro derivatives. Traders can use request for quote or request for market protocols and can upload Ibor portfolios into Tradeweb’s list trading mechanism for conversion into risk free rates.

Elsewhere, in emerging markets, where liquidity is thinner and any kind of inclination to trade is likely to be preyed upon, traders here have also typically favoured a two-way model both using voice and now, electronically. The result: a boom in RFM. At Tradeweb, around 67-68% of volume on its emerging markets platform was accounted for by RFM in Q4 of last year. 

“For dealers it very much replicates an existing voice workflow that they have been doing nigh on decades,” Tradeweb’s global chief operations officer for emerging markets, Will Tarr, tells The TRADE.

“That ability to conceal the direction you’re trading pre-trade and then only reveal it to a couple of participants post-trade gives clients a much greater degree of comfort trading that electronically.”

Tradeweb and the London Stock Exchange Group’s (LSEG) FXall launched a new FX swap workflow solution for local currency emerging markets in August last year. The solution links trading workflows in local currency EM bonds and FX swaps through a single user interface (UI). Using the solution, mutual clients of the pair can buy or sell an emerging markets bond via Tradeweb’s RFQ or RFM protocols.

Tradeweb is now working on building out its RFM offering in emerging cash markets in local currencies.

Using an RFM protocol also contributes, Tarr confirms, to better calculation of the mid-price in emerging markets trading rather than look at a static curve. Something that also translates into the rates space as well.

“When you’re asking for one side of that PV [present value] market, you have to calculate how much you’re being charged, what’s the real mid, is the trade PV accurate? It might be in an area of the curve where there’s not a lot of liquidity and granularity and you want to look at a truer TCA,” explains McDiarmid.

“It’s much easier to do that when you put two or three dealers in competition and it makes it much cleaner to assess the real mid of that trade at that time for that size of trade when you have two-way pricing.”

All of this points to RFM as a natural next step in the development of electronic workflows in fixed income. Dealers are becoming increasingly confident quoting two way on platform, McDiarmid confirms, and some of this is driven by transferable behaviour from trading in other asset classes.

“They can still show an axe and skew that price to a direction they want to trade but they’re showing an honest two way at time of execution for that specific size. I’m happy to pay here and I’m happy to receive that,” he says.

“A really good example of that [transferable behaviour] is where we trade swaps versus bonds in non-contingent asset swaps. Clients have questioned, understandably, why they can ask for a two-way price on the swap leg and have to show their direction on the bond leg? It’s about that consistency.”

Rates vs credit

However, when looking at other potential use cases for the RFM protocol, there remains some areas whereby alerting several dealers of your interest – using two-way pricing or not – could prove to be harmful for the buy-side. While the RFM protocol is having an undeniable rise to fame in the rates space, whether it will see the same adoption in credit is another story all together.

Read more – Tradeweb and LSEG’s FXall launch new emerging markets FX swap workflow solution

Many have suggested that the natural next step, following this sudden interest from the street in rates, is for RFM to expand further into other corners of the fixed income sphere, creeping into credit when used correctly. Here is where the use cases of the protocol and its usefulness in reducing market impact become more difficult to justify.

“There is absolutely a place for RFM in fixed income, particularly in local markets, but I think it must be considered carefully what the best execution method is for a particular bond as often the market dynamics or inventory and liquidity of the line don’t result in RFM being the optimal protocol to use,” explains head of European FICC trading Manulife Investment Management, Peter Welsby.

In some markets, regardless of whether or not you’re showing a two-way direction, thanks to the liquidity landscape, it becomes easy to work out a firm’s intentions. This renders a protocol like RFM potentially harmful to execution in some cases. And, makes it extremely important to pick and choose when you use protocols.

“Whilst in smaller sizes it might not make much of a difference, for larger-sized credit trades quoting a multitude of banks, using RFM is likely to worsen the pricing received,” Welsby explains.

“The client may think that they’ve hidden their direction, but often in credit it can be quite predictable which direction the client is. As such, rather than using RFQ with select liquidity providers with strong relationships and market presence to minimise information leakage, the client has shown their full size to a whole host of dealers. This could negatively impact the winner of the trade and evidently won’t result in better pricing in the long run.”

Given inventory restrictions in credit, it’s often more challenging for a broker/bank to make a two-way price if they don’t have the bond to begin with. In credit, it’s also harder to source bonds from smaller issuances than in the local markets and because of that dealers are more reluctant to reveal their hand without a strong relationship with the buy-side client.

“We would consider using the RFM protocol for trades that are normal market size and where the market is deep and liquid,” adds Ruffles. “Market makers will be less sensitive to the direction of the trade and potential for information slippage, and so they are likely to be more comfortable making a tight two-way price.”

RFM has seen a rapid rise in demand in the rates markets in recent months. And this shows no signs of abating given the expected central bank activity throughout the course of this year and the predicted movement in the money markets.

While some macroeconomic factors such as reduced central bank balance sheet could cause a reduction in liquidity that could see a move toward more bilateral trading to protect market impact, RFM is undoubtedly set to continue to grow.

Whether or not it ever becomes applicable to more inventory-driven markets is another question with a less positive answer.

The post Smoke and mirrors: The growth of two-way pricing in fixed income appeared first on The TRADE.

The notion of the ‘ideal trader’ was a key topic across numerous conferences and industry reunions last year, where experts across the buy- and sell-side seemingly agree that the optimum mix is a high performing quant individual with a good grasp of data combined with a sociable attitude. However, coming out on top was the consistent belief that embracing the increasingly technological market is paramount. 

The technical side

“The trader of tomorrow should ideally be able to do coding, data analysis, have the relationship with the sell-side and their own teams internally, as well as be an automation enabler and be able to assess technology,” said Peter Welsby, head of European FICC trading at Manulife Investment Management, speaking at the Fixed Income Leaders Summit Europe in October 2023. 

Where the skillset of traders has continued to evolve, due in large part to an increasingly data-driven market, so too has the notion of subject matter expertise. No longer are traders solely required to arrive, learn and sit still. Constantly educating oneself on ever-evolving processes is paramount. 

“The more modern skills, such as being able to navigate an ever-changing market microstructure or get into the weeds analysing data, are now also essential,” explains Graham Sorrell, managing director and head of EMEA and APAC equity, currency and derivatives trading at State Street Global Advisors. 

“The ideal trader requires a combination of traditional and modern skills. That being said, you cannot underestimate how important it is for a trader to possess some key traits, such as being able to spot that anomaly in a large data set or juggle multiple items at once with an incredibly high degree of accuracy. 

“[…] To run a successful trading team, you require a diverse mix of skills. That blend provides the foundations of an efficient and successful trading team.” 

Heads of desks across the market agree that in this new age, the spectrum, educational backgrounds of candidates has also increasingly widened in order to plug ‘tech’ gaps. 

Historically, the majority of traders have typically been either accounting and finance or economics majors. Today, however, desks are seeking more and more candidates qualified in maths or computer science, as well as a swathe of individuals comfortable coding or learning to code on the job. 

Looking deeper into the empirical skills needed on the desk, Chris Pizzotti, senior managing director, global head of FX voice trading at State Street, says one of the most noticeable differences, compared to 10-15 years ago, is that programming skills are increasingly highly-sought-after – and is something set to be progressively important going forward. 

“As a trader, if you are making markets electronically you need to be able to make adjustments to pricing and spreads as the market adapts to changing conditions. While gaining experience of the macro environment takes time, a junior trader who can program, can make an immediate contribution to the trading desk,” he explains. 

Speaking to The TRADE earlier this year, Dan Burke, managing director and global head of credit e-trading at Standard Chartered, asserted that looking at his trading desk today, every team member is coding in Python, something that he explained “you would not have seen in credit trading even two years ago”. 

“We now have access to so many more data sets and variables that instantly price huge numbers of bonds, so candidates need to be very comfortable with maths and statistics,” he said.  

“Being able to confidently engage with this data and sculpt strategy by writing your own code is now essential, especially now as our competitors are not just traditional banking peers, but newer fintech firms as well. More and more, price formation is happening via smart algos, so our traders are morphing into a combination of programmers and risk managers.” 

Nevertheless, the need for traders to cultivate real-life relationships in order to be successful has not shifted from the fore – although technical skillsets develop, market onlookers agree that being likeable remains something that should be nurtured in tandem. 

“We are a long way from the stage where the only role of the human is to feed the dog that keeps the human from touching the machine,” adds Sorrell. “While so much of what is done today is done electronically, a lot of that is underpinned by broader relationships, which is one of the areas where having good people skills comes to the fore. Navigating through the period of extreme uncertainty and volatility we saw during the Covid pandemic demonstrated that.” 

Thus, despite the clear importance of technological capacity, a successful trader cannot survive on data alone. A plane will fly itself, but there will always be a need for the pilot to land it – especially in times of turbulence. Therefore, market participants agree that a combination of both new skills and the conventional are essential to playing the role of the ‘ideal trader’. 

In other words, what currently equates to a successful trader does not mean the death of the personality hire. Indeed, market volatility has over and over again exacerbated the need for the human side of trading.  

The personal side 

Typically, when hiring someone onto the desk, the easy and go-to answer for decades has boiled down to selecting someone at the top of their game. Central to this concept has been the extrovert and overall ‘people person’ – sociable, likeable and palatable. A winner. However, what being at the top of your game really means empirically has changed. 

While this ability to build external relationships remains an important facet, the market appears to be increasingly valuing what individuals are really like on the inside. 

Self-awareness, emotional health, stability and temperament are all personal aspects to the game also – and it’s when looking inwards that an important, and for a long time overlooked, aspect of being an ‘ideal trader’ comes to the fore. Someone with a strong mental will. 

“You read a lot on people saying some traders need to be unemotional but that’s not the case. Everyone’s got emotions and it’s fine to have emotions, but you need to be aware of them,” says David McAnany, co-head of foreign exchange, EMEA at BNY Mellon. 

“If you’re really, really restricted and you’re feeling negative, that’s fine, but then don’t go putting on a significant amount of risk or putting on a trade. Conversely, if you’re feeling super happy because you’ve made some money maybe it can be easy to be a little bit greedy or a bit bold which could need to be reined in just a little bit.” 

The ups and downs of a traders’ life is well documented, and so it speaks to reason that the ability to cope with these often incredible highs and lows is vital – with the most successful individuals being those with the ability to be mentally consistent. 

“It’s about your ability to control, you’re going to have emotions but to understand how to be able to control the emotion is the key. If you don’t feel something from trading, you’re not going to enjoy it,” explains Jordan Barnett, managing director and global head of custody FX trading and product at BNY Mellon. 

Elsewhere, skillsets aside, what the market continues to value almost number one is drive – a prevailing trait from the 80s floor trader to the new millennium algo specialist. The importance of hunger and the want to develop further has never waned. 

“[It’s] something which you can’t learn at university. It also knows no boundaries in terms of diversity,” adds McAnany. “It’s very psychological. Sometimes your worst enemy is yourself, something a lot of people don’t really think about. It’s important for traders to strive to be the best possible version of oneself in order to succeed. This includes things inside and outside of the office, like diet, exercise, right mental frame of mind.” 

A good headspace is also closely linked to the ability to multi-task. It is a key and often ignored component to being a good fit for trading, Barnett explains. 

“Studies show that multitasking doesn’t always work well. That idea is very ironic because in trading, you absolutely have to multitask, he says. “It is inherent to the job, it’s fundamental that you are able to do, listen and process multiple things at once.” 

Relatedly, a key talking point across the market in recent times has been on enlisting the most well-rounded traders in order to cope with increasing change and the high stakes game being played. 

Speaking at TradeTech FX 2023, Carolina Trujillo, head of e-FX distribution at SEB, made clear how times may be changing, but proactivity is here to stay. 

“Gone are the days where you would come into a position and have a steep learning curve for a few months and then sit comfortably for five years. The young talent definitely wants to be challenged and wants to grow continuously,” she said. 

“[…] We need great specialists, but we also want them to have many complementary skills. We want those people to learn and grow and be much more adaptable and be able to move across different paths.” 

The best of both worlds 

A one size fits all answer to the ‘perfect trader’ adage is an impossible feat. It is clear that where the two sides come together – both the technical and the personal – is the ability and psychological range to grow, coupled with the proactivity to keep up. Accurate self-reflection, followed by action, is the pervasive trait of the successful trader. 

In the end, it’s not about the technical skills with which an individual arrives, nor the personal factors which makes for good connections. Instead, the market overarchingly believes success comes down to one’s willingness to adapt, learn and develop on all levels. 

Speaking to this, Pizzotti says: “While technologies, as always, help humans improve efficiency and productivity, talent remains an important part of any trading desk.” 

In order to be considered ‘ideal’ as a trader it is no longer enough to have just half of the bases covered, especially amidst times of stress. The ideal trader must put in the effort to plug their own gaps and constantly seek improvement, educating oneself on the technical side which will not magically come, as well as investing in oneself to build resilience. 

“The desired skillset has matured, it’s more well-rounded and that’s how we stack the desks, with well-rounded talent,” explains Barnett. 

The consistent quest to optimise your own processes appears to be the overarching key to success, but importantly, this is true for both newcomers and individuals who have spent years in the job. In a changing environment, open-mindedness is the key to longevity. 

In the fast-paced world of trading, there is a reason not everyone cuts the mustard – in another profession it might be fine to take your foot off the pedal occasionally or fall back ever so slightly as the office technology upgrades, but for a trader keeping up is imperative. 

“If you have a really good year trading, it has no bearing on the fact that your next year might not be as good. As a result, traders have to stay ahead of what’s coming at them,” Barnett concludes. 

Amidst an ever-changing market, what it means to be well rounded in this space has enhanced, and the market agrees that if you fall behind, you will stay behind. 

The post “They’re the perfect trader” appeared first on The TRADE.

Regulation will continue to direct market trends in 2024, just as it has in recent years. The knock-on effects from the impending switch in May to T+1 settlement for US instruments need to be monitored and prepared for, particularly in FX. In fixed income, focus will remain on data transparency and whether consolidated tapes would be beneficial or detrimental to liquidity in the EU and emerging markets. Other topics that will continue to garner attention include ESG, peer-to-peer execution and the prevalence and perception of pre-hedging.  

James Maxfield, chief product officer, Duco

In 2024, regulatory challenges will loom large for compliance departments within the financial services sector. Impending deadlines such as T+1 and Emir Refit will be top priorities for firms, demanding action. Against the additional challenge of the current economic environment, there will be a noticeable strain on budgets and resources. In response, organisations will need to work smarter and create the case for transformation to drive automation. This means leveraging technology, automating their infrastructure, and investing in the right areas, to not only meet immediate deadlines but also to proactively navigate potential future requirements like T+1 in Europe, global regulatory changes (such as the wave of refits) and the ongoing industry trend of becoming more data driven (around reporting, supervision and risk).

Transitioning to T+1 may mitigate risks in the trade settlement process; however, it also introduces additional complexity and potentially increased costs elsewhere. Although firms might have an inclination to rely on automation to address these challenges, automating processes with inaccurate data will still result in exceptions that require immediate management on T+0 to meet the new timelines. Firms need to employ a data-centric approach if they are to avoid difficulties in meeting deadlines and fulfilling data requirements. Those that grasp both the challenge and opportunity presented by T+1 will navigate the transition more easily, enjoy its advantages and secure a means to gain a competitive edge. The first half of 2024 will be an opportunity for firms to not only ready themselves for immediate regulatory changes but also position strategically for the evolving landscape of trading in the years ahead. It is time to change the mindset of acting after it’s too late and addressing problems before they arise. 

Lisa Danino-Lewis, chief growth officer, CLS

May 2024 will see the implementation of T+1 in the US and Canada securities market, which will impact FX post-trade. Understanding the extent of the impact is key to helping the industry prepare. As a result, we are engaging with both sell- and buy-side clients to understand the challenges they may face with meeting a shortened settlement cycle and explore how CLS’s current suite of products can assist the market in the short term. We are also conducting a study with our settlement members to assess the feasibility of adjusting CLS Settlement processes to accommodate later cut-off times. As we move into 2024, the T+1 spotlight will broaden to bring the UK, EU and Switzerland into focus, with announcements expected from each as to their intentions with regards to T+1.   

Val Wotton, managing director and general manager institutional trade processing, DTCC

In 2024 we will see the shift to a T+1 settlement cycle in the US, which promises significant advantages for financial markets. Benefits include reduced trade risk, lower clearing fund requirements, improved capital utilisation, and enhanced operational efficiency. However, for those firms who are still using manual post-trade processes, it is critical that they leverage automated solutions to achieve timely settlement. Further, to ensure a smooth transition by the implementation date of 28 May 2024, comprehensive industry testing is essential, covering end-to-end processes from trade execution to trade settlement and non-standard settlement scenarios.

As part of their preparations, it is crucial for market participants to understand what is required of them to comply with the regulatory mandate, including post-trade processes which are unique to the US, such as trade affirmation, which is a critical and unique step in successful trade processing in the region. Assessing operational efficiency and counterparties’ performance is also vital as over time, costs associated with late settlements or inefficient processes can add up. With the T+1 implementation date approaching, it is imperative to act now, understand the impact, test rigorously, and automate post-trade processes for T+1 readiness. 

Mack Gill, chief operating officer at Torstone Technology 

As we look towards 2024, I predict that automation will take centre stage. The ongoing transition to T+1 in North America has been a significant catalyst for the global industry, underscoring the need for more streamlined processes. However, the true game-changer will be the longer-term broader adoption of automation across financial operations. I foresee firms increasingly embracing automated solutions to enhance real-time processing and decision-making.

This shift is not just about keeping pace with regulatory changes; it’s a strategic move to harness greater operational efficiency, risk mitigation, and cost-effectiveness. Automation will play a pivotal role in transforming data management, compliance, and customer service, leading to more resilient and agile financial ecosystems. As the industry gravitates towards even faster settlement cycles and further integrates digital assets, the need for sophisticated, real-time automated systems will become more pronounced. The firms that invest in these technologies will likely emerge as leaders in a landscape where agility and efficiency are paramount. Next year, 2024, could well be remembered as the year when automation reshaped the financial services industry under the banner of T+1.

The post The TRADE predictions series 2024: Market Structure – T+1 appeared first on The TRADE.

Manulife Investment Management is set to acquire multi-sector alternative credit manager CQS for an undisclosed sum with the deal set to close in early 2024.

The transaction will allow clients of both firms enhanced investment solutions, allowing them access to the complementary global offerings.

Specifically, Manulife intends to retain CQS’s “rigorous investment philosophy and process and bring its differentiated capabilities to new investors while scaling its distribution footprint across broader client segments and geographies”.

In addition, Manulife has confirmed that it will continuously invest in the business to develop the business’ strategies and continue to best serve CQS’ clients.

London-based CQS has around $13.5 billion in assets under management as of October this year.

Paul Lorentz, president and chief executive of Manulife Investment Management, said: “CQS brings to our portfolio a proven investment process, robust performance, and expertise across market cycles, and a culture that has attracted both talent and flows into the firm. 

“We are very excited for the opportunity as CQS’s capabilities are a complement to our existing fixed income and multi-asset solutions business and a powerful addition to our global credit offering.” 

CQS was founded in 1999 by Lord Hintze and has since evolved into a multi-sector credit platform, offering alternative credit strategies including: corporate credit, asset backed securities, collateralised loan obligations, regulatory capital, convertible bonds, and structured credit, as well as ESG credentials. 

Senior leadership is set to be retained following the acquisition and Lord Hintze will form his own firm from which to manage his fund.

Soraya Chabarek, chief exeucitve of CQS highlighted the key benefits of the transaction: “In Manulife Investment Management we have found the optimal long-term partner. We share a client-focused culture, and the support of its strong platform and global distribution combined with the autonomy of our investment teams will ensure we continue to strive to deliver attractive long-term returns to our client base.

“[…] Over the last decade we have transformed CQS into a global alternative credit platform and this transaction is an exciting and important strategic step forward for our business, our clients, and our employees.”

The post Manulife Investment Management to acquire alternative credit manager, CQS appeared first on The TRADE.

The key benefits of merging the trading function to be multi-asset have to come down to efficiency and scale, both as it relates to the execution of trades but also on how the trader operates when observing markets, providing market colour and looking at data. Technology is at the forefront of this movement and the electronification/automation of many parts of the execution function allow the human element of trading to be more focused on larger, more complex trades that carry greater risk and as the role of trading develops, into other areas of the overall asset management business.

Key among them being the provision of market colour and adding to the idea generation process. The trader of today has to be able to distil a vast amount of disparate information and filter it in a bespoke fashion to the needs of individual portfolio management teams. The benefits of doing this across asset classes allows traders to build a broader view of the market each day, allowing them to spot market correlations and offer market color at a wider scale, fostering insights and knowledge-sharing across various market landscapes.

On the execution side, having the experience of trading across multiple assets and liquidity landscapes allows a trader to apply key learnings from one asset class to another, you are constantly learning and increasing your adaptability which gives you more tools at your disposal when trying to achieve best execution.

It’s true to say that alongside the role of trading, the structure of portfolios is adapting to contemporary trends and fewer portfolios today are truly ‘single asset’, as portfolio managers look to access more markets or hedge their exposures in different ways, it helps for them to have a single access point to all these markets rather than a more fragmented approach.

How does the skillset of a multi-asset trader vary from a single asset trader? And why are more desks merging asset class trading now?

Multi-asset traders must be able to adapt to multiple different liquidity dynamics on the fly. That requires the ability to utilise many different execution methods, be it electronic, RFS, voice, bartering, understanding the mechanics of algos. The full range is required, and you are required to be an expert at all of them. Each corner of the market is different in its etiquette and liquidity and as a trader it’s imperative that you can switch seamlessly between them and be able to take a view on what works best in each scenario to achieve what is best for your underlying clients.

Alongside the role of pure execution, traders of today must wear multiple hats, especially when executing across multiple asset classes. Traders must have both a macro and micro view of the market at any given time to allow them to engage with teams in conversations on macro strategy, advise them on market microstructure, as well as monitor and analyse TCA data on a pre- and post-trade basis.

On why more desks are merging asset classes, clearly the ability for traders to execute across more asset classes at greater scale than ever before presents an effective strategy for cost-cutting. By amalgamating trading across asset classes firms can streamline operations and make savings through consolidation and this is as true in trading as it is for any other role. It also comes as no surprise as the transformation brought by automation in the trading landscape has redefined the role of the buy-side trader and has created time and space for traders to delve into more intricate tasks that demand human intelligence, adaptability, and strategic thinking.

How can you ensure a best execution and a specialist service for each asset classes on a multi-asset desk?

To provide a specialist service to all internal stakeholders across a multi-asset desk it is imperative that the trader has the ability to tap into the vast wealth of resources that our trading partners provide us. There is an incredible pool of talent on the sell-side across sales, traders, strategists and research and as the trader it is your job to filter this information individually to the needs of each and every team that it will add value to internally. Even with the increased presence of technology within our execution toolkit, the human element of trading is as important as ever, a strong relationship and open dialogue allows our partners to understand our execution styles and markets helps us to achieve best execution at scale.

Operating in this way also provides traders with a more expansive view of the market. Market moving catalysts can come from anywhere and being on top of the information flow allows you to put this information in front of those who matter as fast as possible. This isn’t possible when it is coming from outside your silo.

By trading cross-product, traders can also provide a better high touch service for trades that come as a package. If trade and hedge are performed by the same trader for example, it is far more likely that any potential errors at the trade creation process are caught, actually enhancing the overall control framework.

How could the multi-asset trading process be further automated/optimised to make it more efficient?

Optimising the multi-asset trading process can of course be realised through further advancements in technology. While there are several providers looking to provide solutions in this space, the search for true multi-asset OMS and EMS platforms has not yet reached market consensus. This, alongside further improvements in rules-based auto-execution building rules across platforms will allow traders to focus even further on the areas they can provide the greatest value, ultimately better servicing our clients.

The post Multi-asset trading: Reduced errors and enhanced high touch execution appeared first on The TRADE.

Peter Welsby

PETER WELSBY, Senior Multi-Asset Trader, Manulife Investment Management 

At the start of 2021, the majority of NDF flow was on Primary markets, however, new entrants have been gaining traction, with mid-matching venues and secondaries growing their market share. 

Manulife’s main FX Trading objective for 2023 is to continue to improve the best-in-class execution that we achieve for our clients. Some key areas to focus on will be how market infrastructure and liquidity patterns are evolving and how capital requirements impact our liquidity providers. 

From a spot trading perspective, market infrastructure is starting to converge between developed markets (DM) and emerging markets (EM). For a while now DM volumes have been moving away from Primary ECNs and toward bank client matching pools, mid-matching venues and secondary ECNs. For deliverable EM and NDFs however, it has been a slower move away from Primary ECNs. At the start of 2021, the majority of NDF flow was on Primary markets, however, new entrants have been gaining traction, with mid-matching venues and secondaries growing their market share. We may be starting to reach critical mass in terms of liquidity pools in DM, but it doesn’t feel we have gotten there yet in EM. With signalling becoming particularly noticeable on lit ECNs for EM currencies, alternative liquidity sources can be helpful reduce market impact and improve slippage, especially in volatile markets with thin liquidity. 

One evolving liquidity pattern is related to off-SEF and on-SEF fragmentation. During Asian hours, most trading is done off-SEF whereas during US hours, most trading is on-SEF. Historically, many banks have either been set up to trade on-SEF or off-SEF. Whilst this is becoming less of a problem, as more banks can now do both, certainly not all have this ability yet. Those that don’t have had to find more innovative ways to deal with it. For example, access to onshore helps banks to hedge flow if off-SEF is a struggle. But once onshore is shut, it becomes harder. Equally, not all banks have access to onshore in each country. 

The time of the day also needs to be considered when optimising execution. It seems natural that Korean Won would trade more volume off-SEF during Asian hours than on-SEF during US hours. However once off-SEF starts to dry up at 10am, there is a dark period until the US starts trading after midday London hours. Equally, there are drops in liquidity over ‘lunch breaks’ for EM currencies. CEEMEA pairs see a far greater dip in liquidity between 11am and 1pm London hours than G7 pairs do and similarly CNH and HKD see a dip between 4am and 6am London time. Essentially, once outside the majors, it becomes difficult to maintain execution costs at a similar level around the clock. Improved liquidity in these dryer periods is something the market can work on going forward. 

An additional challenge that the market has experienced more recently is related to forwards liquidity and pricing. SA-CCR has been causing RWA challenges for some banks, with the consequence of balance sheet premium often being wider forward spreads from a select group of banks at the same time.    

All of this highlights the need for the buy-side to pick wisely which banks are on their panels. 

Damilola Otakoya

DAMILOLA OTAKOYA, multi-asset investment dealer, Aegon Asset Management 

Emphasis should also be placed not only on attracting diverse talent but promoting an inclusive/ diverse culture and environment.

A diverse range of skills will be required to navigate and thrive in tomorrow’s data and tech driven environment. Skills which we value today to analyse, interpret, and utilise data, technologies in order to provide best execution and solutions for our clients will remain very important. Skills which make use of machine learning and coding on platforms such as python will be indispensable. I feel most importantly that the soft skills which we place in high regard today such as communication, problems solving, attention to detail and relationship building which allow us to collaborate effectively with internal and external aspects of our business, share ideas and ultimately allow us to better service our clients and provide best execution will continue to be of paramount importance. 

The pandemic forced many of us to place greater emphasis on business continuity, infrastructure and investing in more robust technologies to optimize workflow and enhance productivity. Adaptability and flexibility are key to future proofing desks in this quickly evolving environment with greater focus now more than ever placed on automation, regulatory conduct and culture and I believe that those that stand still run the risk of being left behind. 

Diversity is also key to future proofing and attracting new talent. As part of a diverse team myself with colleagues from different backgrounds and cultures and with a broad range of ideas, I fully appreciate the way this allows us to evolve organically within a modern and collaborative working and trading environment while this diversity of thought and expertise will allow us to meet future challenges in many ways. Advertising on diverse platforms and networks, using inclusive language on job descriptions, having a diverse panel and taking part in many initiatives out there that cater for diverse talent is important. Student outreach is also very important starting early in schools and colleges to speak about the range of career paths on offer and encourage young students to consider a future career in the industry – something Aegon AM has been heavily involved in. Emphasis should also be placed not only on attracting diverse talent but promoting an inclusive/ diverse culture and environment which works to retain, nurture and promote diverse talent. 

I think it would have been difficult to predict the last five years without a crystal ball. We have had a pandemic, lockdowns, war in Eastern Europe, inflation, rising interest rates, real risk of recession and the rise of crypto. In the future I think we will continue to embrace technology and go down the path of further automation and electronification. Better machine learning and Algos across the full FX product range including NDFs. Better gathering and utilising quality data. Better pre trade analytics and post trade TCA. All of these factors combined will work to ultimately reduce human error, increase oversight and achieve best execution for our clients. 

Patrick Forde

PATRICK FORDE, head of trading, Fulcrum Asset Management 

UMR has increased the cost of holding OTC FX positions for the buy-side and prime brokers. This makes the traditional FX model (OTC and PB) more expensive. 

The recent growth in the FX futures market is driven from two sides. Firstly, the benefits of holding a centrally cleared product vs an OTC FX trade. Secondly, recent changes made by the CME (and other exchanges) to allow futures participants access wider OTC liquidity pools. Holding a future can have substantial benefits in terms of leverage/sum of notional calculations, margin requirements, counterparty risk, as well as operational efficiencies. Changes made to FX futures contracts in recent years have substantially reduced some of the liquidity barriers to trading FX futures, particularly in less liquid contracts outside G4 currencies. In the past, the only option was to trade on the exchanges Central Limit Order Book of the future directly, which limited sources of liquidity for larger trades. The CME have now introduced ‘EFRP’ (Exchange for Physical), so one can now agree an OTC FX trade and exchange that for a future once the OTC trade is done. This allows us to have the best of both worlds, in that one can access all available liquidity (across the CME Order book, and the OTC market), while holding a centrally cleared product. 

Many market makers/banks continue to look at FX futures as distinct products/separate risk to OTC FX. Historically, this made sense as these products were not fungible/interchangeable. Now that the CME allow exchange of an OTC FX trade into a future, market makers need to rethink this separation and come up with products that give buy-side participants flexibility to move between OTC and futures liquidity more easily. Most banks require a manual step to Block or EFRP to FX options and futures, this makes pricing slow and cumbersome. We need solutions that automate this process in order to make it scalable and operationally safe. 

UMR has increased the cost of holding OTC FX positions for the buy-side and prime brokers. This makes the traditional FX model (OTC and PB) more expensive. Prime Brokers are also finding their FX PB less profitable in this environment which ultimately makes it less attractive as a business for them. I expect this will lead to substantial changes in how the FX market is intermediated in the next 3 to 5 years. The two obvious alternatives to FX PB are FX futures or a Centrally Cleared OTC market like we have in Interest Rate Swaps and Credit. The Centrally Cleared OTC offering in FX is still very limited, mostly to Non-Deliverable Forwards and lacks scale due to lack of uptake. This lack of scale ultimately makes it less diversified and more expensive at present. This leaves FX futures as the most attractive option, for now, to gain FX exposure in a scalable, cleared market. 

Building a knowledge base on how the FX futures market works and different ways to access various pools of liquidity is a key starting point. For some currencies/trade sizes it might be optimal to trade on the Central Limit Order Book of the exchange, while trading FX futures in less liquid currencies in large size, it is essential to understand how one can gain access to OTC liquidity, using EFRPs and Blocks to translate this into a future. 

Sunil Patil

SUNIL PATIL, senior trader, APG Asset Management 

DLT can essentially take away settlement risk and thus enable a big institutional trader to transact with, say a retail investor, without worrying about the paperwork or needing a prime brokerage in between. 

DLT (Distributed Ledger Technology) in combination with central bank digital currencies (CBDC) can fundamentally change market infrastructure over the next decade. With the advent of digital currencies, big-tech involvement in payments, and rapid rise of digital transactions, traditional cash is quickly losing its charm and CBs are concerned about losing control over how money flows in the system, and now almost every major CB has plans to introduce CBDC. Inherent features of DLT like instant settlement, on-chain smart contracts and innovative usage of permissioned blockchain have unlimited potential in traditional finance, however, regulation, platform uniformity/standardization and robustness will eventually lead to broader acceptance of the technology. 

Traditionally, big asset managers are risk averse and will be skeptical to be first adopters of a new unproven technology. FX markets tend to follow the volume and without volume a new tech/venue/platform will not be successful, it’s the proverbial chicken and egg problem. So no, I don’t see FX markets to be traded via ledgers in next few years. That said, I believe the benefits and cost savings from DLT will eventually tip the market in its favor. We are still in early days and lots of innovation and development is still needed before it becomes safe and robust to trade huge volumes. When that happens, DLT can essentially take away settlement risk and thus enable a big institutional trader to transact with, say a retail investor, without worrying about the paperwork or needing a prime brokerage in between. A proper democratization of FX markets. 

Web3 as it is evolving will probably create several ecosystems where the ‘money’ circulates within, with limited overlap with FX markets. FX markets will eventually benefit from the pace of innovation in web3, CBDC being a great example, where the idea was really put on fast track after the announcement of Libra by Facebook (Meta). 

Defi apps or DApps have created a lot of buzz recently and have also made financial inclusion a reality, anyone who has a smartphone is able to access some of the most sophisticated products on market. Increased interest from retail investors in financial products and FX specifically can lead to higher trading volumes. Some of the DApps architechture can materially enhance traditional financial products (depo/repo, sec lending, swaps) in addition to opening up a world of new products, say auto-hedging a bond trade on smart contracts. A big feature of DeFi is instant trade settlement making the creditworthiness of counterparts a technicality rather than an obligation, which can reduce a significant amount of work for contract negotiations and risk teams, not to mention efficient usage of collaterals. 

How these features will eventually affect traditional finance and FX markets in particular, will depend a lot on what view regulators and market participants take in general. 

The post FX Voices: From the Floor appeared first on The TRADE.