The growing popularity of multi-asset investment strategies is fuelling the adoption of more complex electronic trading platforms. Regulatory pressure to push transactions from the over-the-counter (OTC) market to traditional exchanges is a catalyst for this trend*.
In response, banks are competing to provide integrated platforms, applying advanced equity algorithmic technologies to the trading of other financial instruments.
Vendors – whether banks or stand-alone software providers – are adding bells and whistles to products and integrating with suppliers, said Kent Rossiter, Asia-Pacific head of trading at Allianz Global Investors. His firm uses an integrated system for transactions in equities, bonds and FX.
“I would think that as the services offered in the market increase, the buy-side will, by default, demand more functionality,” said Hong Kong-based Rossiter.
Anthony Cooper, executive director of electronic equity sales for Asia at UBS, noted: “Investors want platforms that perform well, so latency is not noticeable, and can connect to an array of brokers and markets."
Platforms need to be nimble enough to give traders quick market access, but include functionality spanning easy-to-use order tickets, price ladders (which show a stacked display of market prices in a profile that makes it easier to place and track orders), choice of algos, overall outstanding trade positions and real-time profit and loss across assets.
Such platforms are expensive and difficult to construct to incorporate the idiosyncratic conventions of different asset classes and markets. They need to be calibrated for diverse conditions around liquidity, distribution, volume and daily velocity.
The 2008 financial crisis gave impetus to the development of integrated platforms to help investors and traders manage and monitor the risks of their positions better, as well as improve execution of multi-asset strategies.
Moreover, as this market segment matures, “we’re seeing the pendulum swing back toward consolidation and simplicity”, noted Michael Drake, head of Asia at Redi Technologies, which provides software allowing clients to execute trades electronically.
Last September, Redi, which spun off from Goldman Sachs in July last year, struck a partnership with Citadel Technology to combine the latter’s order management and position management functionality with its execution management system.
The need to do more with less has become a trend, said Drake. “Increasingly, single-asset traders are expanding their roles to trade additional asset classes, as well as multiple geographies."
"Multi-asset platforms are key tools for driving efficiencies for investors and traders with an expanded mandate, or those adopting more complex, cross-asset strategies," he added.
Portfolio managers typically have operated in silos for equities and bonds. As such, separate platforms have been fit for purpose. But banks above all argue that integrated platforms enhance the efficiency of cross-asset trading, given that it can be hard to control and monitor risk if trades are not closely coordinated.
Banks have been making substantial investments. UBS has spent years building a multi-asset platform called UBS Neo, based on its original FX trading platform. This incorporates FX, rates, listed credit derivatives and liquid commodities, and covers trade execution, algos, real-time data, research, risk and profit/loss monitoring, clearing and settlement.
Societe Generale, meanwhile, offers an equity e-trading platform that is coordinated but not yet integrated with the bank’s fixed interest and foreign exchange businesses. The French bank is developing a full multi-asset platform.
Regulatory pressure to improve transparency, such as Dodd-Frank in the US, is driving convergence of trading methods, said Stephane Loiseau, SG's head of cash equities for Asia Pacific and deputy global head of execution for Asia Pacific. This is a catalyst for extending e-trading to liquid fixed income securities, he noted.
But there are limitations. While most traders would prefer everything to be one-touch, some asset classes, such as illiquid local-currency bonds, still have to be traded OTC.
Still, the understanding is that as more dealing desks adopt a multi-asset model, that will drive demand among the buyside. It may be the limitation of real estate on a dealer’s desk that is the biggest driver for multi-dealer applications.
*The full feature on this topic appeared in the July issue of AsianInvestor magazine.