As the introduction of digital assets become increasingly common, their influence on traditional finance is becoming more notable, blurring the line between two seemingly separate, and arguably parallel, financial instruments.

Think of exchanges that now have a digital asset offering, banking giants which have dedicated units and the wave of experienced personnel who have made the transition from traditional finance to this burgeoning sector.

From the rise of blockchain technology to the proliferation of tokenisation – as well as the increased, yet still debatable, acceptance of cryptocurrencies as ‘legitimate’ assets – the impact of digital assets is evident across several facets of the financial ecosystem. The industry can now differentiate between ‘crypto’ and ‘digital assets’, while the old ‘Wild West’ comparisons for the former have now been replaced with opinions of ‘bad actors, not bad assets’.

What doesn’t seem up for debate is the potential of blockchain and how tokenisation will shape the markets of the future.

“For us, blockchain really is an enabler – looking from an infrastructure, product and a client facing perspective – to make processes in the long run safer, more efficient, while also reducing costs and enabling us to create accessibility, especially for retail investors, to additional products which are not tradable or fungible today,” says Christoph Hock, head of tokenisation and digital assets at Union Investment.

Blockchain, at the highest level, is about providing additional transparency, and with that, the opportunity for composability and less need for reconciliation, argues David Newns, head of SIX Digital Exchange (SDX). However, Newns also highlights the importance of regulation to improve and ensure investor protection within this specific asset class.

“The role that institutions play in this space is to find ways to enhance investor safety. When it comes to crypto assets, the notion that you have regulated institutions which are transparent and compliant with regulations will mean you trust them as a counterparty to provide services,” asserts Newns.

“That gives you the confidence that your assets are safe and that your activities are being conducted in the most fair and equitable way possible.”

The importance of regulation

In addition to helping foster investor protection, regulation in digital assets can help ensure market integrity and promote stability in an increasingly digitised financial landscape. Without appropriate oversight, digital asset markets can be left susceptible to fraud, manipulation and other illicit activities.

Regulators can also help facilitate mainstream adoption by bridging the gap between traditional financial and digital assets, contributing to the long-term sustainability and legitimacy of the digital asset ecosystem.

“Our key focus, as of now, is on crypto securities and that’s where governance is clearly required,” emphasises Hock. “All the negative issues around crypto, like FTX and Bankman-Fried which came up in the past, are based on human fraud. It’s not malfunction of the blockchain but human misbehaviour, in combination with a lack of regulation, for example in the US. Therefore, governance is key to ensure that the trust our investors have in us as an asset manager can be fulfilled.”

Impacts on infrastructure

Market infrastructure is being reshaped by digital assets through the introduction of new methodologies for ownership, transferability and transparency. Unlike traditional financial assets, digital assets leverage blockchain technology, enabling peer-to-peer transactions without the need for intermediaries.

The continued evolution of digital assets is helping catalyse the transformation of market infrastructure, shaping a way for a more inclusive, efficient and resilient financial landscape. However, there are still limitations as to how much can be gained in terms of infrastructure in the traditional financial landscape – one being the cost of any change.

“Typically, trading a digital asset requires new functionality such as a digital custodian, new post-trade integrations and/or trading connectivity – anytime a traditional financial firm has to put something like that in place, there has to be a really strong commercial case for why they do that because it’s timely, costly and expensive,” explains Duncan Trenholme, global co-head of digital assets at TP ICAP.

“The reality is if you are going to bring liquidity in from the traditional markets then the new digital trading experience has to be dramatically efficient or cheaper for clients to change their infrastructure.”

With developments linked to blockchain and digital assets surging and subsequently presenting various use cases and areas of improvement for the traditional finance landscape, the phrase ‘don’t fix what isn’t broken’ comes into mind. Traditional financial markets have existed for much longer than digital assets and because of that, any major shifts should be carefully considered.

“Looking at the intersection between blockchain and traditional banking, traditional banking has so much efficiently already in it, despite what you might sometimes hear. It’s highly optimised, it’s very efficient, but there are areas that we can certainly bring significant benefits through blockchain technology,” highlights Newns.

“To get the fundamental benefits, it’s hard work and it’s all about building and getting all the various participants comfortable. In crypto you’re taking traditional structures and you’re trying to accommodate a new asset class into them. In tradfi, however, we’re trying to get an existing asset class and then bring it into a new technology, which can be difficult.”

Where parallels meet 

Traditional finance and digital assets typically operate as two parallel and distinct markets at present, but increasingly there is overlap between the two. Settlement, something that tends to be instant within digital assets – particularly when it comes to cryptocurrencies – is something we see influencing the traditional financial landscape.

However, there is still a lot of work to be done on either connecting the two systems or uplifting the traditional financial systems to be able to support digital assets.

“In traditional finance, we’ve moved to shorter and shorter settlement times. Within securities markets we are currently discussing how to move to T+1 settlement from T+2 and make sure we avoid trades failing at scale,” says Trenholme. “Within crypto they’ve started with the premise of moving collateral within minutes or hours. Crypto challenges the way that traditional markets operate and have grown to operate over the years.”

Looking at what can be learned from digital assets, legacy systems and the need for increased modernisation to bolster efficiency comes into play. Limitations linked to message-based architecture is something market participants are fully aware of, and something that the seemingly parallel nature of digital assets emphasises even more.

“You just can’t do the sort of composable transactions and achieve the reduction in requirement for reconciliation when you’re still sending messages from one platform to another platform. We’ve optimised, but at the same time are inherently constrained by the fact that it’s not instantaneous,” says Newns.

Cryptocurrencies, specifically, have been viewed as attractive due to their ability to be traded 24/7, including on weekends and holidays. Unlike traditional financial markets, such as the equities space, cryptocurrencies are not limited by set trading hours and can operate continuously. Given that they are decentralised and traded across a range of global exchanges, they allow participants to buy, sell and trade cryptocurrencies at any time.

Whether traditional finance will mirror the around-the-clock model is yet to be seen, with varying arguments on whether demand for it exists and whether or not the shift is even feasible.

“You do see some discourse in the news about clients wanting to shorten market hours in certain asset classes, so we should challenge the assumption that just because we can operate markets 24/7, as we see with crypto, that we should operate markets 24/7,” argues Trenholme.

“Ultimately, if you think about the notional of assets that have been tokenised today, it’s still a drop in the ocean compared to the size of traditional finance. As such, it is easy to have a certain scepticism about how meaningful and relevant this could be if you are sat within a traditional business. There’s a lot of promise, and the technology could improve the market considerably, but it hasn’t reached a scale yet where it’s forced clients to alter the way that they trade. That tipping point has not yet been reached.”

Moving forward

Despite the current operation of digital assets and traditional finance as two separate parallels, digital assets’ influence is evident in the increasing integration of blockchain technology into financial infrastructure.

Institutions are exploring tokenisation of assets, converting traditional assets into digital tokens to enhance liquidity and improve accessibility. 

Hock tells The TRADE that Union Investment are one of the first asset managers in this area combining the traditional asset world with the tokenised world.

“For us, our view is that within three to five years of tokenisation of assets – not only of traditional assets but also of products which are not tradeable and are not fungible today – this will become a new normal. Important to highlight that we are not only talking about assets on chain, but also cash on chain, i.e. e-money. This consideration will be most powerful.

“Looking five years down the road, I’m sure tokenisation will become a key topic here for the entire ecosystem and has the potential to be a disruptor and a game changer for the financial industry.”

Digital assets are here to stay and their influence on traditional finance is undeniable. Although still a small fraction of the entire financial ecosystem, it’s clear that digital assets, the innovation linked with them, and the lessons learned from the asset class are influencing the way in which future developments within traditional will be approached.

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Collecting his award, long term friend of The TRADE and buy-side stalwart Hock highlighted the importance of relationships, people and collaboration in this industry.

Hock – whose career in trading spans three decades – is a well-known advocate for institutional adoption of digital assets and distributed ledger technology (DLT) and in his acceptance speech he highlighted the importance of both in the future trading landscape.

In August, news broke that he is set to step away from his role as head of multi-asset trading later this year to pursue an opportunity in digital assets and tokenisation within Union Investment.

Read more – Union Investment’s trading head Hock steps away from role to pursue digital asset aspirations

Hock has been with Union Investment since 2014 and has been instrumental in the development of the firm’s trading strategy and structure. In 2015, the European asset manager unified its trading teams under one multi-asset trading desk as part of a strategic review, aimed at executing a greater percentage of orders sent by portfolio managers.

Union underwent another makeover in 2021, taking on a new hybrid organisational structure that divided this central trading desk into three teams, with his traders filtered by execution type.

The TRADE would like to extend its congratulations to Hock for his long-standing commitment and service to the industry.

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A recent Coalition Greenwich report delved into the top trends affecting FX market structure, pinpointing ‘higher cost of accessing credit’, ‘more electronification of trade execution’, and ‘changing credit provision by banks’ as the main drivers.

Particularly from the buy-side perspective, increased use of cleared FX derivates was also a key consideration according to 37% of surveyed respondents. 

Read more – CME Group on the evolving FX futures and options landscape

A study released yesterday by DataHorizzon Research predicted that the foreign exchange software market size – valued at $7.9 Billion in 2022 – will have a market size of $16.4 Billion by 2032 (a compound annual growth rate of 7.6%). 

Drivers of this, according to the research body, includes rising competition among the key players and high technological adoption, further stating: “In addition, high spending on technology is expected to encourage the adoption.

“[…] Large organisations dominate the foreign exchange software market due to high spending capacity.”

Earlier this week, Ganesh Iyer, chief marketing officer at IPC Systems, highlighted that the FX ecosystem’s increasing complexity was down to the rapid proliferation of counterparties, service providers, execution platforms, and products, suggesting that the focus for market participants was firmly on the pursuit of an integrated trading infrastructure.

Iyer explained that the goal is for that technology “to connect all participants in the transaction lifecycle – buy-side firms, sell-side platforms, exchanges and liquidity providers, clearing/settlement systems, market data providers et al”.

In this vein, market participants are demonstrably making moves at an increased pace, the most recent example being buy-side player, Union Investment, executing its first FX futures trade through Deutsche Börse’s 360T and confirming its intention to implement its EMS in a bid to enhance its execution capabilities.

Speaking in an announcement, 360T explained that the fact that regulatory changes have the potential to theoretically increase costs when it comes to trading FX forwards across OTC channels, will likely make its offering increasingly attractive to market participants going forward.

Speaking to The TRADE this week, Christoph Hock, head of multi-asset trading at Union Investment, said: “What’s important for us when executing – not just in FX but all asset classes – is to get the very best outcome for our investors. Not just best execution, also the regulatory requirements. Our goal is to be connected to the very best platforms and have the best breadth of broker firms on this platform, enabling us to play the white keys, the black keys and the pedals of the piano.”

Results from the recent Coalition Greenwich study on this topic, empirically demonstrated that desks are increasingly investing in this space, aiming to enhance trade execution by prioritising data and workflow management in a bid to keep up with the increasingly complex FX markets. 

The study found that of the top five overall investment priorities for FX desks, three relate to the theme of data and two to workflow, with Coalition Greenwich emphasising the link between these two areas, explaining that “data and workflow go hand in hand; without a systematic workflow, it is difficult to actually get the data.”

The TRADE’s recent exclusive interview with Gordon Noonan, head of FX and rates trading at Schroders, delved into the most important elements with respect to these data capabilities in FX products. 

“On the data front, the swaps market continues to remain opaque with forward pricing not as visible as the spot market. Pricing across banks vary materially in the swap space,” said Noonan, who further added that “as trading technology further advances along with the increase in availability of datasets, it has become even more essential for trading desks to leverage these capabilities to improve execution decisions, maximise efficiency and reduce risks.”

Read more – FX derivatives trading can be streamlined through electronification, but data quality must be assured, say experts.

Also speaking to the specifics around technological requirements earlier this week, Iyer asserted: “In the 4.0 technological age, and with an increasingly tech-savvy demographic occupying traditional trading roles, product and service differentiation must tick new – and many – boxes beyond efficient market access. Managed service solutions enable market participants to easily shop around, enabling freedom of choice and unfettered access to best-of-breed components in the trading stack.” 

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Read more – Union Investment’s trading head Hock steps away from role to pursue digital asset aspirations

Speaking to the decision to trade through 360T, Rico Milde, head of FX trading at Union Investment, said: “Given that we are a long-term user of Eurex FX futures and have many trading relationships to manage, 360T – which offers us a range of specialist execution management capabilities – was a natural choice to partner with.

“We are confident that using the 360T EMS to manage all of our off-exchange futures relationship-trading activity in a fully integrated setup will deliver significant benefits to our trading desk.”

Deutsche Bank was the inaugural foreign exchange futures liquidity provider for Union Investment, with the bank set to reap the benefits of central clearing as well as continuing to take advantage of the customisation of over-the-counter (OTC) FX execution models, according to Hilko Kalberlah, head of DACH FX sales for institutional clients at Deutsche Bank. 

360T provides web-based trading technology for OTC instruments, as well as integration solutions and related services.

Read more: Deutsche Börse rolls out real-time FX pricing data from 360T platform

Speaking in an announcement, 360T explained that the potentially increasing costs when it comes to trading FX forwards across OTC channels, as a result of regulatory changes, will likely make its offering more and more attractive to market participants.

Sebastian Hofmann-Werther, head of EMEA at 360T, highlighted how this move fits into the business’ strategy: “The seamless integration between 360T and Eurex is part of a strategic investment we have made into supporting Listed FX trading alongside our world class OTC offering and we are now able to provide access to a range of different FX futures products to meet the various needs of our diverse, global client base.

“Meanwhile, we continue to see strong adoption of our best-in-class EMS by market-leading firms like Union Investment as they look for ways to continue expanding and enhancing their FX execution capabilities.”

Earlier this month, 360T made streaming mid liquidity via APIs available on its Swaps User Network (SUN), with Deutsche Bank and ING executing the initial trade. According to the business, this was the first time two banks had been able to trade FX swaps via API and match at the market midpoint.

Speaking to The TRADE, Hock said: “When we’re looking at futures transactions we have a higher participation rate compared to most of our peers […] so we’ve been fairly early adopter of this product.

“What’s important for us when executing – not just in FX but all asset classes – is to get the very best outcome for our investors. Not just best execution, also the regulatory requirements. Our goal is to be connected to the very best platforms and have the best breadth of broker firms on this platform, enabling us to play the white keys, the black keys and the pedals of the piano.”

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LCH Group appointed Corentine Poilvet-Clédière as chief executive of the firm’s Paris-based European central counterparty LCH SA. Poilvet-Clédière will assume the role on 1 October, subject to regulatory approvals. She will replace Christophe Hémon, who confirmed he would be stepping down as chief executive of LCH SA on 1 October – when Poilvet-Clédière assumes the role – after nearly two decades in office. Poilvet-Clédière brings over 15 years’ experience in financial markets to the role. She currently serves as head of RepoClear and collateral management at LCH SA. Before that, Poilvet-Clédière was global head of regulatory strategy at LSEG.

Sonal Rashmi has joined equity trading business Instinet in an execution sales role, following seven and a half years at Goldman Sachs. In this new role, she will focus on EMEA clients trading globally – specifically quant clients, The TRADE understands. She was most recently vice president at the investment bank, responsible for the algorithmic trading performances of key clients, as well as undertaking strategic analysis. During her tenure at Goldman Sachs, London-based Rashmi also previously worked as an associate and an analyst. Prior to this, she was a group strategy analyst at HSBC, working across technology strategy, innovation, and blockchain.

Allianz Global Investors appointed Kayvan Vahid as head of equity Europe core and value. Vahid joined AllianzGI from UBS Asset Management where he served in a variety of roles over the last 20 years. Most recently, Vahid served as deputy head of global value equity and head of European mid cap equities, where he held responsibility for managing a range of institutional and retail funds across global, European and UK equity mandates. Prior to that, he served as a portfolio manager for European small and mid-caps as well as a European equities research analyst. As part of the role, Vahid will help strengthen and expand the firm’s capabilities in the fundamentally-managed European core and value space.

Both Barclays and JP Morgan made new appointments within their equities trading and sales teams. Doug Polera was appointed as an equity sales trader at Barclays, joining from Credit Suisse where he spent the last 18 years. While at Credit Suisse, Polera most recently served as director of equity sales trading. Prior to that, he was vice president of international equity trading at the firm.

Elsewhere, Louis Barré was appointed equity derivatives trader at JP Morgan, joining from Barclays where he held the same role. Previously in his career, Barré also served as an equity derivatives trader at Societe Generale Corporate and Investment Banking (SGCIB) as well as Mosaic Finance. Before joining Mosaic Finance, he served as a front office trading assistant for derivative listed products at SGCIB.

The post People Moves Monday: Union Investment, LCH Group, Instinet and more… appeared first on The TRADE.

Union is bolstering its digital assets division, The TRADE understands. His new role is not yet public but will be communicated in due course.

“He [Hock] will be responsible to new important tasks within the Union Investment Group that deal with strategic issues surrounding future topics such as the token economy, digital assets and data science,” said a spokesperson for Union Investment’s asset management division. Hock declined to comment.

Hock has long been an advocate for institutional adoption of digital assets, confirming at TradeTech Europe 2021 that Union was exploring “the token economy” of which crypto was a part. Within plans to explore crypto-related derivatives, tokenisation and exchange-traded products, Hock added that the asset manager was preparing to trade cryptocurrencies from 2022.

Union Investment had in the previous year become the first of its kind on the continent to get involved in a public tokenised European Investment Bank (EIB) bond transaction and currently has a selected fund where it can trade one Bitcoin exchange traded note (ETN).

Hock originally joined Union in 2014 and has since been instrumental in the development of the firm’s trading strategy and structure.

In 2015, the European asset manager unified its trading teams under one multi-asset trading desk as part of a strategic review, aimed at executing a greater percentage of orders sent by portfolio managers.

Union underwent another makeover in 2021, taking on a new hybrid organisational structure that divided this central trading desk into three teams, with his traders filtered by execution type.

Prior to joining Union, Hock previously spent three years at Barclays as head of equity execution sales, four years at Tungsten Capital Management as head of portfolio trading and management, and two and a half years at Ferox Capital Management in a similar role.

Previously in his career, he also spent nearly seven years at JP Morgan Securities as head of European basket trading and later as its head of relative value proprietary desk, and six years at Dresdner Kleinwort Benson in equities roles.

The post Union Investment’s trading head Hock steps away from role to pursue digital asset aspirations appeared first on The TRADE.

Summarising the benefits of DLT, David Nicol, chief executive of LedgerEdge, said: “We use DLT as a tool to give users more control of their data, more nuanced workflows and, in the end, better execution.”

Christopher Hock, head of multi-asset trading at Union Investment, highlighted three key topics that the firm was focusing on in this space. This included: “DLT from an infrastructure perspective, trading traditional assets in a tokenised format and finally, utilising the opportunity to significantly see an expansion of the trader universe.

“Going forward we will have some chances to have non-fungible products which fit into our investment universe to make thing more tradable.”

“This new DLT-based platform allows us to think and develop new user business cases,”

Given developments within the DLT, blockchain and tokenisation space over the last few years, panellists suggested that the industry should maintain a forward-looking approach to allow innovation to continue to exist.

“This new DLT-based platform allows us to think and develop new user business cases,” said Martin Weithofer, head of EMEA sales and relationship management at Six Digital Exchange.

“Market participants should not make the mistake of simply copying and pasting what has been done over the last five years. The next five to ten years will look different and this new technology, this new platform, allows the implementation of much more user business cases.”

Looking at future developments and innovation with this space, Hock mentioned increased focus on a topic which may go live in the next two years – tokenised funds. “At the moment, all our fund products are still based on paper documents which are with a central securities depository (CSD). Going forward we will also consider issuing tokenised funds as well as a non-fungible token at later stage,” said Hock.

“Looking at token economy, we clearly consider this to be a key game changer with a highly disruptive potential and for us it’s really key to be involved in all these developments.”

Echoing Hock’s sentiments on how fund products are still handled manually, Nicol highlighted aims to approach the corporate bond trading market with a fresh perspective.

“We looked at the fact that in 2020, 30-40% of trades were still handled over voice or chat systems, rather than electronically,” said Nicol.

“We thought the corporate bond market was quite standardised. It’s a standard product, there’s a lot of automation potential there, but there’s still this kind of interaction and trust problem that keeps many of the functions very manual, making many of the interactions rather inefficient. We broke it down and we want to give users on both sides of the market a fundamentally better experience.”

Speaking on the importance of continued innovation and development, Hock concluded that “for the last couple of years, technology has been playing a key role in the trading space and without technology, without heavy investments in technology, you can’t run trading successfully regardless of whether you are buy-side or sell-side”.

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Union Investment is in many regards a pioneer. At the forefront of several recent market initiatives, the firm has acted as a benchmark for the European institutional buy-side on sentiment around cryptocurrencies, multi-asset trading, regulation, sustainable trading and now a hybrid organisational structure focused on what the ship’s captain, Christoph Hock, refers to as best-in-class-execution.

Since Hock joined Union in 2014, the European asset manager has undergone a continued evolution, becoming one unified multi-asset trading desk the year after he took the wheel in a bid to execute a bigger percentage of orders sent by portfolio managers. However, his work didn’t stop there. In June last year, Union was reborn with a new hybrid organisational structure that divided this central trading desk into three teams, with his traders filtered by crystalised and clear-cut methods of execution. 

The three teams now sit directly below one head of multi-asset trading, Hock. Two of these are trading focused, split by execution approach depending on the market impact of an order. One is focused on high-touch trading and handles complex orders including those which might be for less liquid instruments or large orders of liquid ones that need to be worked over a few days and could create a large market impact. The other is an electronic solutions technology (EST) team which focuses on orders with minimal market impact where a trader can add little value, opting for speedy, automised and low touch forms of execution. Each unit works in tandem with the other, with the EST team often developing the infrastructure that is then used by the high-touch traders. 

The structure pays homage to the unavoidable presence of automisation in the market while simultaneously stressing the continued importance of high-touch trading. For Hock, the ongoing COVID-19 pandemic and the subsequent market volatility during the last two years has re-confirmed the essential role of the trader on the desk. This importance means that despite a large portion of his team now being dedicated to electronic trading, he always ensures that the desk has enough headcount to ensure continuity of service should automisation become redundant. 

“Intraday volatility is one key denominator for the level of automisation in the market. In volatile markets there is much more involvement from high touch traders. Take fixed income for instance, in March and April last year, we completely switched off our automisation engine because we realised we couldn’t get results as good as when trading these transactions in the traditional high touch and non-automised way,” he says. “It is not about saving head count; it’s about achieving best-in-class execution in the highly liquid stuff that’s partly in an automised way. You have to ensure that you have enough resources in place to deliver your best-in-class approach in these times of volatility. Automisation is not about making less, but smart use of human traders.”

Hock firmly believes that best-in-class execution does not stop with the trader and places equal importance on efficient back-office and middle-office functions. For this reason, Union’s new structure includes a third non-trading front-office unit. This back-middle-front office team deals with the nitty gritty regulation, settlement and compliance cogs that keep the wheels of the machine turning. Named the trading and regulatory services team, it’s responsible for everything from collating and publishing data for best execution RTS 28 reporting – annual top five venue broker reporting – to escalating settlement issues. However, it’s unique from Union’s competitors as despite its non-trading function it enjoys front-office status, which Hock says is key to speedily escalating settlement queries.

“When it comes to escalation, it makes such a difference whether a trading team escalates something with the broker or whether it’s a back-office team. We realise it so often that when queries come from a back-office team, quite often they are ignored. Typically, the back-office team will just have contact with the broker’s back-office team,” adds Hock.

“When executing highly sensitive transactions or transactions in difficult to trade markets like Brazil or in Korea where if you don’t settle in time, there is a punishing penalty regime in place, it’s also important that as a last step in the waterfall a senior guy or even myself escalate these types of transactions with senior management of the broker firms. When you do not have a proper settlement and clearing team, you run the risk of burning through hundreds of thousands of dollars in a worst case scenario when you have transactions which failed to settle.”

While this team sits next to the trading teams in the front-office layer and this is useful for the weight it holds in communication, it does not trade, and this Hock says, means its priorities remain separate, which prevents conflicts of interest. 

“A trader typically is not highly motivated to sort out any settlement queries because it’s not really part of her or his job description. That’s also – when looking at the setup of having specialists in place for the individual roles – why it was important for us to have this middle-office, or trading- and regulatory services as we call it, team in place which is directly connected to the trading team,” he says. “It’s important that you have a unit which by definition is not allowed to trade because when dealing with compliance there could be a potential conflict of interest.”

Multi-asset above all else

No team at Union focuses on one asset class specifically, instead playing host to a handful of individuals who each have a specialism in one. “It’s important to maintain the high level of specialist knowledge we have built over the last couple of years, so we have not thrown away our USPs we have created in equities, fixed income, derivatives, and in FX,” says Hock.

Union went fully multi-asset in 2015 combining its equities and derivatives team with its fixed income and FX desk following the arrival of Hock as its head of trading in the year prior. Hock, who joined Union having previously worked on the sell-side in sales trading, set up a hedge fund and led derivatives proprietary trading at JP Morgan, was multi-asset by nature even then.

He explains that while the asset classes are inherently different, they have similarities across regulation, liquidity and technology which mean there are efficiencies that can be achieved by combining them all under one desk. Similarities, for example, between how to manage illiquid paper in fixed income such as emerging markets bonds or high yield and small to mid-caps in the equities space, highlights Hock. Meanwhile, liquidity shifting events such as news stories also have a cross-asset impact, meaning a combined desk is better equipped to manage them and traders can utilise these synergies and learn from one another to improve execution, he adds.

“For us it’s important to engage with regulators and so it doesn’t really make sense to look individually at certain themes for each asset class. It takes you a good time to build this network and so we want one person responsible for cash, equities, fixed income, and FX. When you have a big news story out in the market effecting an equity price you will also most likely see significant effects in the corporate bond and  single name credit default swaps (CDS) market of that specific issuer, and there will probably be an impact in equity derivatives in the options of this corporate. This could also potentially have implications on levels in securities lending,” says Hock.

“Take a protocol like portfolio trading. That was just one way of trading equities five-to-10 years ago and now it’s widely accepted in fixed income. Take RFQ mechanisms, which originally were designed for trading against risk capital in fixed income and in FX, which are now used in equities or algos that were originally for equities and are now used in FX. That’s something you are missing when you do not holistically look at trading and assure that the individual asset class-based traders are talking to each other.”

Technology

Union’s philosophy, however, is not to provide a one-size-fits-all blanket execution system for all asset classes. While a highly complex cross-asset system would be difficult to use in a speedy manner, says Hock, a generic easy-to-use blanket system would not effectively deliver on a high enough percentage of orders received. 

“Our clear message is that for the individual asset classes we prefer to add complexity by selecting the best-in-class system for each asset class rather than having a one-size-fits-all solution which just gets you a 70 to 80% outcome,” he says. “For trading we’ve decided to build on top of our Charles River order and execution management system where we needed, additional, specific infrastructure.”

The asset manager has one basic skeletal provider of portfolio management, trading and middle- and back-office, Charles River. This acts as a foundation for a combination of external execution management systems (EMS) and internally developed solutions to be added on top. In equities, for example, Union selected FlexTrade’s EMS as a bolt on for Charles River.

“We had very specific requirements and we found that FlexTrade was the one vendor which could deliver those to us. It’s important to have straight through processing (STP) in place. You can route business to FlexTrade out of Charles River and execute the transactions out of that. The fills are then routed back to Charles River and then funnelled through the process chain, back-office systems and to settlement and clearing.”

In fixed income and derivatives, it’s a different story. After finding that the market couldn’t provide a system that could fulfil its needs, the asset manager developed an in-house solution on top of Charles River, making no use of an external EMS. According to Hock, designing an EMS for derivatives is an entirely different prospect as there are fewer venues to trade with than in equities where there are multiple channels and pools of liquidity. 

“When trading EuroStoxx futures or when trading bond futures you have exactly one venue where these products are traded. That’s why an EMS in derivatives is important, but it needs to be designed in a completely different way than the one in equities or in fixed income,” he says.

Despite championing separate best-in-class systems for each asset class, Union pools data across asset classes in one central data lake which can then be dipped into as and when needed. “It doesn’t make huge sense to have a data lake for each asset class. In our experience you want to have one common database with all the trade relevant information,”
says Hock.

A token economy

Union has proved itself ahead of the curve with regards to the growing token economy. Amid distributed ledger technology (DLT), cryptocurrencies and other digital assets, and smart contracts’ rise to fame, the asset manager became the first of its kind on the continent to get involved in a public tokenised European Investment Bank (EIB) bond transaction and currently has a selected fund where it can trade one Bitcoin exchange traded note (ETN). However, when it comes to whether Union has plans to expand that scope with more funds and delta one products, Hock holds his cards close to his chest. “Possibly,” he says with a wry smile. 

“There are some add-ons to existing asset classes we could potentially keep an eye on. One is crypto and another one is non-fungible tokens (NFTs). I don’t see us trading digital pictures, but as a part of NFTs you might be able to trade also real estate somewhere in the secondary market in the future. Given the fact that we have a very strong footprint in real estate, this might become an interesting topic for us.”

At TradeTech earlier in November, Hock told an audience that Union Investment would be ready to trade native crypto by the middle of next year, confirming that he was was conducting in-depth partnership talks with custody banks on the potential launch of a crypto custody solution. He also confirmed that Union had been exploring digital assets for the past four years. According to him, all institutions should be laying the groundwork for a token economy now to avoid missing the boat through delayed implementation later down the line when serious client demand develops. 

“If you start planning at the time when there is client demand picking up you’re probably late by one-to-two years. It’s important to do the planning in a proactive way with the anticipation that the demand might come up in the coming years,” he says. “You have to start doing the prep work now and take a visionary view about the developments in the token economy. This means not only looking at what the needs are of clients today, but also from a strategic standpoint looking what their needs could be in two-to-three or even five years. You don’t want to build a parallel infrastructure to the traditional assets we have in place, but instead combine what’s possible going forward with distributed ledger technology (DLT).”

For Hock, the tokenised economy is too often oversimplified down to the trading of cryptocurrencies, which to him does not fufill the definition of currencies because of their volatility. The meme generation are the ones currently getting involved in direct cryptocurrency investments, he says. Instead, he finds that the world of DLT and smart contracts and their application in the middle- and back-office, settlement, and custody could be where the game-changing element lies for institutions.

“In certain types of products when it comes to documentation, for instance for over-the-counter (OTC) derivatives, you could make use of smart contracts,” adds Hock. “We’ve for years discussed the mandatory buy-in as a part of the CSDR regulation which has now – thankfully – been postponed after intervention from the buy- and sell-side. In the future, you could have T+0 settlement – so atomic or instant settlement – using these technologies, avoiding for, example, counterparty risk.”

Regulation

The contentious mandatory buy-in regime as part of the Central Securities Depositories Regulation (CSDR) Settlement Discipline Regime is just one of the fronts where Union, led by Hock, has been vocal and reactionary on behalf of the wider market. 

“In difficult-to-trade names, if broker-dealers knew they might run a potential risk of a mandatory buy-in which they can’t deliver and might cost them millions of euros, they probably wouldn’t want to make us markets and show offers anymore. The CSDR penalty regime will kick in in February next year and this will further reduce the number of fails. A potential mandatory buy-in would have minor positive effects on settlement discipline only, but massively negative effects on liquidity and market structure,” says Hock. “I spoke to regulators, central banks and treasury departments about the negative implacations making them aware of that. It’s important to have an intensive communication with regulators. At the end of the day, they decide about the framework we operate in, but it’s important also to share thoughts from an investors perspective and potential concerns on regulatory initiatives to give them the opportunity to have second thoughts about it.”

The regime sought to make it mandatory for a failing counterparty to have a buy-in initiated against it with limited time and flexibility as to when this could be completed. Institutions across the Street have canvassed the regime for years due to the damage it could pose to liquidity by discouraging counterparties from making markets. The regulation was originally due to come into play in February next year, however, lobbyists managed to get it delayed again in November with experts predicting this time it could be for several years.

Hock has been involved in most ongoing regulatory discussions to grip the market in the last year, sitting within an FX group with the European Central Bank, representing the buy-side in an ESMA secondary markets working group, and operating in senior roles at not-for-profit Plato Partnership and Neptune Networks. Capital markets regulation has evolved significantly throughout Hock’s tenure at Union, with MiFID II being implemented in 2018 and bringing with it best execution requirements among swathes of other changes. The ongoing aftermath of the UK and Europe’s Brexit fallout in 2016 has subsequently meant institutions like Union must navigate an ever more divergent regulatory landscape. 

“MiFID II generally led us to a more complex world. However, the subsequent fragmentation has also been a key driver for bringing higher levels of transparency and driving exchange fees down. This complex ecosystem gives us the opportunity to decide what is the very best way for us to get each individual order done. This flexibility and variety of channels we have actually is highly supportive in terms of delivering best-in-class execution to our investors,” says Hock.

“The spirit of regulation has to point in the same direction. I think at the end of the day regulators know about the importance of an equal level playing field across the regions. Our job is to deliver best-in-class execution to our investors and that’s regardless of whether the investors are domiciled here in Germany or whether we are talking about investors we have in the UK or in Scandinavia and therefore we need a regulatory environment that takes this into account. That’s why I’m not tired of having discussions and meetings and phone conferences with various regulators and being heavily engaged to achieve this goal.”

Sustainable trading

In the area of environmental, social and governance (ESG), Union Investment is one of the institutions to lead the charge particularly in the recent market initiative aimed at involving the trading community in the ongoing green conversation. 

Announced by Duncan Higgins in November, the Sustainable Trading initiative is a membership network open to the buy- and sell-side alongside FinTechs and trading venues that will act as a forum for institutions to meet and create industry best practices to be implemented in the trading markets. It’s aimed at addressing the issues specific to trading, including the sustainability of institutions’ internal operations and external supply chains including counterparties.

Union was among one of the first supporters of the initiative alongside T. Rowe Price, Liontrust Asset Management, Invesco, Federated Hermes, Jefferies, BMO, Redburn, Instinet, and Euronext. “There’s absolutely no reason why ESG should stop in the process chain at the portfolio managers desk and not involve trading at all,” Hock explains.

Union under Hock’s leadership has proved to be a thought leader in an ever-changing market landscape, projecting its own style and perspective onto ongoing trends, including the rollercoaster that is the market’s uptake in tokens and its laboured transition to a more sustainable operating model. The institution’s new horizontal, multi-asset and automisation focused structure is reflective of how the market has been moulded by increasing globalisation and consolidation. 

“It’s a hybrid organisational structure. In trading, it’s not two silos that we’ve created which are completely independent and separate from each other. When trading, communication and sharing thoughts, ideas and observations is really key.”

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According to the research from Coalition Greenwich, the electronification of the FICC markets has increased costs, which make it more difficult for liquidity providers to return their cost of capital. As platforms charge fixed fees, however, they have not experienced the same erosion on margins. Platforms also often charge additional fees ranging from credit intermediation, ancillary service costs, straight through processing and platform administration. The research has implied that the growing costs are beginning to resonate with the buy-side and encourage more bilateral forms of trading.

In response to increased costs, direct connections between a liquidity provider and taker are increasingly desirable as they allow the liquidity provider to maintain control over margins and data, and minimise information leakage. The multi-dealer vs single dealer debate has long-been debated in FX markets in recent years, but whether that translates as heavily in credit and rates is yet to be seen.

There is little evidence to imply that buy-side credit and rates traders are pushing for bilateral connections as aggressively as their sell-side counterparts. While information leakage and data control are definite pain points for the buy-side, costs incurred through trading on venues are often absorbed by liquidity providers. In other words, it is not really the buy-side’s problem yet and offers them little incentive to alter their current tried and tested methods of execution in this market.

“I’d say for the past 18 months, there has seemed to be more of a drive from the sell-side to encourage us to adopt some of these potentially direct connections and therefore avoid going through a venue,” said Stuart Campbell, head of trading at fixed income specialist, Bluebay Asset Management.

One of the key factors driving the sell-side’s desire for bilateral connections is the control of transaction data, of which they have almost none.

“One of the most irksome unintended consequences [of electronification in the FICC markets and subsequent use of multi-dealer platforms] is that participants lose control of the data associated with their activity, which is then repackaged and sold back to the end users. Platforms take different approaches to these services, but they are frequently charged in aggregate, making it hard to attribute to individual transactions,” said Coalition Greenwich’s Thomas Jaques and Subodh Karnik, authors of the report.

Traders in the FICC trading landscape are captive to a select few multilateral trading facilities (MTFs) such as MarketAxess, Bloomberg and Tradeweb. Almost all trading volumes go through these platforms and they possess a monopoly on data. It is a key pain point across the Street, with many firms begrudged at the prospect of being charged for the data they have generated through their own supply and demand.

While bilateral connections allow traders to control who sees their data, this alone is not enough for buy-side firms to forgo multi-dealer RFQ platforms altogether and limit themselves to a smaller pool of liquidity providers.

Untrustworthy data

A direct connection with one or a select few liquidity providers is reliant on trustworthy data, which is often fragmented and requires intensive scraping. Third-party platforms are heavily integrated into buy-side workflow and implementing a new bilateral connection is a long-term and expensive endeavour. These solutions can be developed in-house or offered through APIs via an order management system (OMS) provider.

“Pre-trade data in this market is not something I want to spend money on. I would not need to go to the rest of the market and RFQ to 100 people and give away all that information leakage if I could trust that a bank is offering the best price,” adds Campbell.

“If I can believe the prices that I see on the screen that are being shown to me then I’d be more willing to engage directly with a bank. The reality is, sometimes when I engage with them, they’re not the best price at all. I don’t have enough trust in that data.”

A potential solution to the data conundrum is a consolidated tape. Similar to the TRACE system in the US, firms could access data at a significantly lower cost. Participants and trade unions alike have come together in the last few years in their calls for a standardised data offering in Europe, however, due to the enormity of the task of creating a tape that fits the needs of all participants, the road to its development has proved to be long and windy.

In response to ongoing pressure, the European Commission set out plans in early 2021 to design and implement a consolidated tape in the primary and secondary bond markets as part of a review of MiFID II.

With a standardised and reliable source of data in the market, FICC buy-side firms may be convinced that the cost of implementing a bilateral connection with a smaller number of liquidity providers could be a worthwhile investment.

“Unfortunately, there has not been many people put their hat into the ring to generate a consolidated tape, but we are hopeful that one will come. Ultimately, it’s got some negatives, but we think it will be beneficial. If we can get that then I’d be far more willing to go down a more data intensive path than we’re currently on now,” says Campbell.

The sell-side pays the price

While control of data in fixed income is a pain for both the buy- and sell-side, when it comes to the costs incurred from the services provided by trading platforms, including credit monitoring and netting, it is the sell-side that bears the brunt.

“Is the buy-side only going into bilateral trading because of these explicit costs? No, definitely not. In general, the sell-side is making direct fee payments as part of the RFQ process for these transactions on MTFs. The buy-side is charged only in an indirect way as a part of the net price received,” Christoph Hock, head of multi-asset trading at Union Investment, explains.

“At first look, focusing on trading fees only, it might seem easier to interact directly with sell-side firms without an MTF involved. However, our impression is that an RFQ mechanism is one where we get the very best result for our investors, and that’s the reason why a decent percentage of our business goes via this process.”

Large US bulge bracket banks can pay up to $50 million each year from transactions that take place on platforms. However, price bundling means venue-incurred costs can be difficult to separate and are not always seen by the buy-side.

“The cost increases seem to be more damaging to the sell-side than the buy-side. There is maybe a slight increase on the fees that we are charged to do a trade on a venue. The price does move around,” adds Campbell.

“If the buy-side push to see exactly what the cost is on every ticket, I think more people will become aware of the fact they’re being charged for these trades. That might drive a second wave of people taking their trading offline to their own interface of API connections.”

Information leakage and competition

In sending an RFQ to multiple brokers, there is the risk of information leakage. Coalition’s study said liquidity providers uniformly highlighted the damaging impact of this on market efficiency. Although, this is dependent on the size and nature of the trade being executed and on the reliability of the data put out by liquidity providers in sensitive scenarios bilateral trading methods are preferred.

“When we are looking at a medium size order it really matters how many broker firms we ask for a price. If you blast an RFQ for such a type of order to 15 or 20 broker firms, you have a significant information leakage and get most likely a decent number of rejects,” says Hock.

“Involved broker firms realise the whole Street is aware of this individual transaction and know therefore it might take days to trade out of this position. The highly sensitive trades in the high yield world and in emerging markets for example, that is where you just ask one or maybe two broker firms for a quote to achieve the best outcome for your investors, and that’s fully in-line with best execution.”

Information leakage has the potential to damage a firm’s ability to hedge their positions. Often referred to as the ‘winners’ curse’, the firm that wins the best price must move quickly to ensure it has hedged away any risk. If too slow, it is at risk of having negative positions put out by competitor firms.

Bilateral connections certainly apply themselves well to the trading of some financial instruments. For example, when trading treasuries, buy-side firms can get comfortable with limiting themselves to five or six direct connections with major sell-side banks. However, multi-dealer platforms, and the breadth of liquidity available on them, are more applicable for the trading of others. The danger that in a bilateral connection a liquidity provider may not offer the best price remains.

“In bilateral trading, as the market structure is currently set up, it is less likely to create this highly competitive element which delivers you the most aggressive price. Therefore, the most efficient way for us to achieve the best result in the fixed income world is still the RFQ process,” adds Hock.

“Some broker firms might offer you a different price when they know that that there is no competitive element. However, in the future maybe the market will move in the direction of having a central limit order book (CLOB) for certain types of fixed income instruments, a kind of click-and-trade facility for a number of aggregated broker streams.”

While the desire for bilateral connections in FICC trading remains with the sell-side, implementing a new channel of this kind has a high initial cost, which can act as an incentive for buy-side firms to instead connect to a venue. Due to this high cost and level of complication of implementation, a ready to use plug and play solution is often preferred.

“I don’t want to spend a lot of time and money building my own technological solution for a problem that doesn’t really exist for me at the moment. I would need that to be on a plate right in front of me offered as an out of the box solution by my OMS provider and I would need to see some significant benefit to me trading bilaterally rather than through the venue,” adds Campbell. “But at that point I want to make sure I’m not a venue.”

Still a way to go

While Coalition Greenwich’s report suggests FICC traders are leaning towards bilateral connections, the largest share of credit and rates respondents, 47% and 44% respectively, plan to continue to use RFQ on multi-dealer platforms most heavily in the future.

There is not enough incentive for buy-side firms to start trading bilaterally. Costs are absorbed by the sell-side and until pricing changes from indication only to click-to-trade, it seems unlikely that the small indirect increase in fees dedicated to platform commissions will drive buy-side firms to dedicate lofty sums to developing the infrastructure needed for bilateral connections.

MiFID II reguIation has continued to encourage trading volumes onto lit venues and regulators are increasingly examining the definition of a venue. Streaming pricing from bilateral connections from multiple liquidity providers via in-house APIs leaves buy-side firms at risk of being defined as an MTF and buried in an additional layer of costs.

“If we all gravitate and take our trading off-venue there’s nothing to say that the venue may just collapse its pricing structure and so straight away its everybody back on board,” concludes Campbell.

The post FICC bilateral trading? Not enough incentive for the buy-side appeared first on The TRADE.

Amateur investors have increasingly engaged with retail platforms in the last year, partly due to the pandemic leaving them idol at home, but also due to the newfound onslaught of information through social media and access to the market through retail brokerages and platforms such as Robinhood.

Set up in 2013 the mobile trading app, now valued at $21 billion and proclaimed to be democratising finance, offers investors access to the financial markets with zero commissions.

“For the largest online brokers, the number of daily trades has tripled since 2019,” John Marshall, head of derivatives research at Goldman Sachs, commented on a retail investment podcast from the US bank. “But this has mainly been driven by a small portion of their customer base. These day traders are less than 10% of their customers, but they represent more than half of their trades.”

Meme-stocks

The events that took place involved stocks such as GameStop and AMC Entertainment in what is considered one of the first social media driven and coordinated buying regimes by retail investors. It resulted in market conditions likened to the dot com bubble around the turn of the century, leading to concerns that institutional investors must now adapt their risk models to mitigate the possibility of this happening again.

To put the gravity of the situation into perspective, on 27 January at the height of the GameStop saga, 24 billion shares were traded on US exchanges, surpassing the previously set record by 4 billion shares traded in the 2008 global financial crisis.

“Until now, retail trading activity has never been able to move the market one way or another. However, following the successful coordination by a large group of traders, the power dynamic has shifted; exposing the vulnerability of the market as well as the weaknesses in firms’ trading systems,” says Guy Warren, chief executive officer of FinTech ITRS Group.

“20 February marks one year since the beginning of the COVID-19 stock market crash. Twelve months on and the trading landscape has changed forever – but not as a consequence of the global pandemic. Instead, the retail trading revolt of Reddit users has been the catalyst to change the game entirely.”

Well-informed individuals keen to manipulate the market, posted information on social media forums such as the Reddit chatroom r/wallstreetbets, which boasts 4.8 million members, encouraging the masses to buy shares with the hope that it would drive the price of certain stocks up. Motives behind this onslaught ranged from making personal profit to a desire to squeeze the short positions of hedge funds.

Prompted by the information posted on social media retail investors began buying these so called “meme-stocks” including GameStop, AMC Entertainment, Blackberry, and Nokia. The activity sent their prices soaring, with the GameStop share prices climbing over 1000% in just two weeks.

Retail investors usually focus on large-cap names as opposed to the small-cap consumer stocks undergoing structural challenges. Information on social media, however, drew attention to these struggling companies. 

“When investors see testimonials of others that have had outsized returns their attracted to more speculative trading strategies,” added Marshall in the Goldman Sachs podcast.

On 26 January, billionaire chief executive of electric car company Tesla, Elon Musk, affectionately dubbed Papa Musk on Reddit, tweeted “Gamestonk!!” with a link to the r/wallstreetbets chatroom. Musk’s twitter profile with 48 million followers gathered even more momentum for the exploding GameStop share price increase.

“We’ve all seen what happens to markets when Elon Musk tweets something.  Somebody might want to take his phone charger away for a while,” says Matt McLoughlin, head of trading at Liontrust Asset Management.

“However, this is the first time that we’ve witnessed social media being used by groups of people to move markets. There are other challenges that social media will bring to financial markets and this is probably the first taster of what’s to come.”

Steal from the rich to give to the poor

GameStop was heavily shorted by hedge funds. As a brick and mortar shop during a global pandemic selling physical games in an increasingly digitised market, the company was expected to underperform.

Through social media, retail investors weaponised their involvement in stock markets to negatively affect hedge funds who had taken short positions in companies like GameStop.

“A co-ordinated and well-informed market manipulation used retail platforms like Robinhood to squeeze shorts on the likes of GameStop and AMC,” says Steve Keslo, head of markets at ITI Capital.

A short squeeze takes place when a price is deliberately driven higher to increase the losses of hedge funds that had bet the price would fall. It is exacerbated by the fact that hedge funds with short bets are also forced to buy back shares to minimise their losses, further driving the price up.

According to data and analytics firm S3 Partners, by 27 January short sellers had accumulated losses of more than $5 billion in 2021, including a loss of $1.6 billion on the 22 January and $917 million on 25 January.

Social media forums have become breeding grounds for ‘activism investment’ and an anti-Wall Street establishment movement, driven by retail investors who have banded together in a bid to take down financial institutions by squeezing their short positions.

“In wider society, financial markets don’t have the best reputation and outsiders view hedge funds in an even worse light, which is probably why they have been targeted in the GameStop saga,” explains McLoughlin.

“Some GIFs on social media platforms said that it would be funny to take a global investment bank down. I don’t think it would be funny for the US economy or good for the individuals making those GIFs if that actually happened.  There is sometimes a disconnect between what is put on social media and reality.”

Rethink risk

With many Reddit revolutionaries praising the chaos that has ensued for certain financial institutions there is the potential for another coordinated social media-fuelled squeeze to take place, and for this reason, institutional investors will need to place a greater emphasis on risk management practices.

Social media has continued to play a role in stock markets since the GameStop saga. The Securities and Exchange Commission (SEC) stepped in and banned trading in six names on 26 February following speculation that they “may also have been targets of apparent social media attempts to artificially inflate their stock price”.

Reddit favourites such as GameStop and AMC Entertainment also continued to rally on 1 March, rising 10.1% and 13.7% respectively, as more day traders congregated on social media to try and repeat the spikes seen in January.

The risk models of certain hedge funds and institutional investors proved themselves redundant in a situation like the one that unfolded in January. As an event like it has never happened before, risk models have never had to comprehend the situation that took place and were subsequently not equipped to manage them.

“If you’re a hedge fund engaged in the practice of shorting and that’s part of your business model, you’re running a long book and a short book and you’re relatively balanced, you’ve had a certain view of how much risk any single-name short position could be,” Raj Mahajan, global head of systematic client franchise at Goldman Sachs, said alongside Marshall in the Goldman Sachs podcast.

“But what we learned last week is that the risk models didn’t contemplate a 10x move in the short against you or a 20x move in the short against you.”

As their positions became increasingly squeezed, hedge funds were also forced to reduce their leverage by trading in more solid and secure stocks. This in turn has meant that long-only buy-side firms have felt the effects of the volatility taking place in the short market.

“This situation was important for long investors to understand because all of a sudden hedge funds started selling long positions in other solid names where asset managers were investing, and all of a sudden you had some limited selling pressure in these names,” says Christoph Hock, head of multi-asset trading at Union Investment.

Not dissimilar from the way Yahoo message boards were used by traders in the past to inform themselves about trading strategies and trends, institutional traders will now have to pay greater attention to information posted on social media platforms such as Reddit and Twitter.

Retail participation in a particular stock will have to be assessed further by those intending to invest in it and hedge funds in particular will have to pay close attention to posts on Reddit in order to stay ahead of the curve.

“These days to fully get the picture right to understand what’s going on in the market you definitely have to take into account what retail investors are doing,” adds Hock.

Institutional investors may also be forced to further diversify their portfolios with alternative assets and strategies as a means to mitigate the risk associated with volatility in the equities market.

“Asset managers will be increasingly aware of the asymmetric risk associated with shorting single-stock equities, particularly within market-neutral and traditional long-short vehicles and mandates. Instead, these traditional stock pickers will need to invest in the expertise of risk management via derivatives and more diverse hedging strategies,” explains Keslo.

Eight-year highs in silver prices caused by retail investors following GameStop also forced Aberdeen Standard Investors to introduce a ‘Reddit Clause’ to its physically backed silver exchange traded-fund (ETF), referring to the potential manipulation of silver pricing through social media campaigns.

Financial regulators now face a conundrum on how to regulate this squirming mass of individual social media accounts and how to determine what constitutes market manipulation. As the situation reached a crescendo on 28 January Robinhood was forced to place a ban on users purchasing securities such as GameStop that had gathered momentum on social media.

Since then, outraged retail investors have filed multiple lawsuits against Robinhood, infuriated that institutions were not subject to similar bans and restrictions on trading. The question of whether access to the stock markets is sufficiently democratised is now firmly on the table and will continue to be debated for months to come.

While the US equities markets has ultimately righted itself, the GameStop saga has identified a weakness that will need to be addressed. The face of the market has changed and with a growing number of people now able to access and share information through social media, the door remains open for further turbulence that could negatively impact institutional investors.

“Asset managers and hedge funds will start to pay a lot more attention to the risks around social media and its potential impact,” McLoughlin concludes.

The post The Reddit revolt: GameStop and the impact of social media on institutional investors appeared first on The TRADE.