Multi-Asset Trading: Art Or Science?

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By Joseph Bacchi, Head of Multi-Asset Trading and Investment Operations, Acadian Asset Management

A reliance on electronic tools creates a danger that the human qualities and expertise of a multi-asset trading desk are not fully harnessed.

Multi-asset class trading is certainly not a new concept, yet it is one that is gathering steam as trading enterprises look not only to expand capabilities and access, but in some cases to narrow headcount and broaden responsibilities.

So, the question is: what exactly is the right trading desk model?

There are some that contend multi-asset traders should be able to trade any product in any asset class – that is, equity and fixed income – the definition of a generalist.  Others endorse a desk consisting of a blend of specialists and generalists with traders that have an overarching knowledge of certain tradable  instruments coupled with those that “sweat the small stuff” – flow versus focus.  Both versions are certainly attainable, but are either the right option when put in the context of trading and overhead costs, execution quality and robust relationships with the sell-side?

There is a third option, one that is achievable and addresses the demands and needs of a firm that wants the knowledge and flexibility a full service multi-asset class trading desk can provide with the focus realised in a single asset class format. The solution is an asset class generalist who acts as an investment product specialist, or “Genspec”.

This is a trader who knows in detail the execution and operational landscape of the specific asset class they travel (equity or fixed income, not both), yet can dig for the gems to add value to the investment process and, ultimately, the client.  Here it is critical that a sharpened quality of execution as well as market and product understanding be the standard, not the broad quantity of knowledge.  It is this type of trader that is essential, for he or she understands both the art (the relationship) and the science (execution) of trading.

The science
For the better part of ten years the advent and advancement of electronic trading has transformed the way trading is approached, monitored, benchmarked and executed.  It has given us speed that could not have been foreseen at conception, access to liquidity from multiple sources never envisioned and, in most cases, a narrowing of spreads spurred by increased competition for flow.   Electronic venues have worked to help all traders not only execute trades in a more efficient and cost effective manner when compared to some traditional methods, but with partners who share the same aim of increased trading effectiveness on behalf of the end client.  Or so we thought.

Electronic trading and enhanced capabilities in equities, futures and foreign exchange, have given the buyside trading community access and control like it has never had before.  The baby steps into the fixed income marketplace should yield better results as lessons from the equity rollout are documented.  This “science” is completely necessary to any successful multi-asset enterprise (or any trading discipline for that matter), but the focus need not be solely on this one path.  The acceleration of the mind-set of bringing as much trading in-house as possible is a natural progression of the electronic age.  “Just give us the tools we need and we can do it better and cheaper,” the buy-side says.  Who can argue with that?

More control and greater access at a potentially lower impact point is a worthwhile pursuit regardless of the investment discipline or marketplace.  But, does this thinking run the risk of pushing the pendulum too far from what truly makes a multi-asset class desk unique and viable?

The art
The answer is yes.  Most market participants are aware of the issues that are still inherent in trading electronically, so that alone should lead to caution before putting all of one’s eggs in that basket.  For the multi-asset trader, balance is the key.  Here is where the traditional relationships with the sell-side, those that are often incorrectly viewed as archaic and costly, strike that necessary balance.

Trading multi-asset requires an understanding that is born from knowing that one solution, whether that be product type, trading venue or broker relationship, does not solve all. Having options – in trading tools (order and execution management systems, alternative trading systems), in products (listed/over-the-counter (OTC)/structured) and relationships (traditional/derivatives/electronic) – is the best arrow in the quiver. Here’s the “art.”

Access to capital, natural flow, inventory axes, as examples, lend options not only for better execution quality, but to better relationships with the broker community as core competencies are discovered and can be fully utilized in the future. These are factors that promote the now fading human touch.

Since all assets types do not trade electronically, such as OTC and structured products, building these necessary partnerships with the sell-side helps the multi-asset trader in two important ways.

First, it provides greater access to trade ideas that can work to reduce overall trading costs while gaining the desired exposures. Second, it increases the knowledge footprint of the enterprise not only by gaining access in potentially better, more esoteric ways, but allows for an increased awareness of the regulatory and operational environments that is critical to any trader these days, especially for those that trade in grey areas, such as OTC.

The second point is an exciting by-product of this balanced solution, because it is the trading desk where intuitive, problem-solving, exposure enhancing ideas originate. Being the effective repository of execution quality and end-to-end trade processing is invaluable and permits greater communication with, as well as greater confidence from, supported investment managers. It will also spur conversations with investment professionals who are interested in learning more about gaining traditional exposures in non-traditional ways.

Striking the balance
Concentrating too heavily on any one element of trading restricts both innovation and opportunity. Successful multi-asset trading efforts should be a combination of the right environment, the right tools and the right relationships.

The focus is to be a front-to-back expert in the asset class one trades; to have access to liquidity and products that lends options to the trade process and yields cost effective results; and an understanding with the sell-side that they are partners, not adversaries.

Crucially, they are partners that provide ideas and solutions, yet partners that must accept and agree that the client is the most important part of any trade, not their own revenue stream. It is here that art indeed blends with science and where the “Genspec” trader lives and thrives.

Why be a slave to the pendulum when you can be its master?

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