By Eric Böss, Global Head of Trading and Christoph Mast, Global Head of Equity Trading, Allianz Global Investors.
Christoph: Allianz Global Investors historically had a trading setup focussed on equities organised in silos and by regions. Over the last 15 years the system has evolved so that regions are responsible not only for the trading of the portfolio managers in their region, but they are focusing on the time zone trades, regardless of where the portfolio manager sits. For Asian and US portfolio managers, the advantage is that they have a trading desk in the time zone in their respective region. This means they have an increased concentration of specialist traders in a particular stock for their fund, within their region and globally.
The process has been challenging because we had to get both the trading software in place and also ensure that all the rules and regulations of the different regions and countries were fulfilled.
Next we started to broaden the scope of trading to cover all asset classes. Currently we are as involved in trading on the equities side as we are on the fixed income side. There is also a huge trading business on the derivatives side and an FX trading desk focusing on the FX trades of the portfolio managers. Currently, we are in the process of extrapolating the long-established equity global dealing structure for fixed income to the regional trading desks. We have already moved on a global basis with emerging market fixed income trades over the last couple years but we are now working on a structure which will allow us to trade fixed income and derivatives wherever it needs to be traded and for any of our global accounts.
A global setup
Christoph: Allianz Global Investors has 24 traders in Europe, seven traders in the US and 18 in Asia-Pacific trading all asset classes. So there is a strong centralised trading desk in each region. This structure raises many questions, including: how much do each of the desks trade for their own region? How much do they trade for other regions? How big a market participant are we in a particular region? What’s happening as far as flows are concerned? What is the impact on execution quality and the feedback of the portfolio managers? How much is our business focusing on portfolio management centricity? What developments are not only measuring the performance of the traders but also the input of the portfolio managers as far as information flow goes?
Eric: Allianz Global Investors now is a truly global asset manager with operations in all three major time zones, active in most asset classes and running a global trading setup that acts as one platform serving all portfolio managers.
Despite our global reach we firmly believe in regional presence and think there is value in regional trading expertise. Taking for example market micro structure and liquidity, these are very different in for example France and the US. So having a US-based trader for the US and Europe-focused traders in Europe and the same for Asia is something that we still consider is the best way forward for equity markets.
While on the one hand we want to be regional, we do still have to make sure that we are scalable on a global level. The approach we are taking with fixed income trading is very similar, because fixed income markets are regional as well to some extent. But there are parts of it, like the Treasury market and the related derivatives markets which are very much global products where the location of the trader is less relevant. However, other segments like covered bonds, corporates, emerging markets or high yield can be fairly local.
We are currently building on the successful model implemented in equities in terms of our fixed income trading expertise. That is building regional expertise, connecting it in one trading system and at the same time ensuring that we are not getting too granular – avoiding the risk of not being scalable anymore . This is occasionally a difficult balance to strike.
Beyond equities and fixed income there are two more asset classes we trade – FX and derivatives. Derivatives are by definition a group of instruments of their own, so we decided that having derivative specialists within the firm is a valid way to go, especially in an environment where derivatives are used widely.
It is extremely helpful to have people with expertise on the instrument side as well as on the related underlying market side. Derivatives, while many of them trade like equities, are settled completely differently. There are margins involved, different exchange rules, and they fall under different regulations. These are the main reasons why we decided to have specialist derivatives teams trading at least in those regions where there is sufficient trading volume to make that a valid decision. Currently those are the US and Europe.
We also have a FX team in Europe, which is partly due to the fact that Europe is the most multifaceted market in terms of number and complexity of funds. FX is the least regionally specific market, so trading can be located pretty much anywhere which is why we decided to leave it in Europe where most of the client base active in currencies is located.