TMCnet News
Crossing the Asset-Class Chasm -- Alpha-seeking firms increasingly are looking to cross-asset trading and multi-asset platforms to improve performance.(Wall Street & Technology Via Thomson Dialog NewsEdge) Ian Battye and Michael DuCharme are focused on foreign exchange trading at Russell Investment Group. But foreign currency isn't the only asset class on their minds these days. As the trading world increasingly reaches overseas, where growth and margin opportunities are higher, Battye and DuCharme's activities are becoming more and more important to the firm as a whole. In its efforts to create better results for clients, Russell is doing what so many other firms, big and small, are doing - it's turning to cross-asset trading and bringing the trading of two or more asset classes together onto a single platform for more efficiency, better risk management, better position reporting and viewing, and ultimately better returns. And that's where Battye and DuCharme see beyond currency and into equities, bonds and other asset classes. Of course, the more tech-savvy hedge fund side of the industry has been using one platform to trade multiple assets for some time; some hedge funds even have developed their own platforms internally as a means to maintaining competitive advantage. But the trend is spreading as larger, more traditional investment management firms are jumping on the multi-asset-trading bandwagon in search of alpha. Among smaller firms, the trend seems to be driven by overseas trading and the desire to bring equity and foreign exchange efforts together. Regardless of size, buy-side firms are starting their cross-asset forays slowly. The focus might first be on asset classes that are interconnected and lend themselves well to combined trading views. For example, a firm might bring together equities and foreign exchange as a starting point and then branch out to derivatives. "Firms are always searching for alpha and new opportunities to beat the competition," observes Andy Nybo, senior analyst at TABB Group. "They're looking at new asset classes - from energy to commodities to foreign markets. And as they expand, they need systems that can manage the complexity of trading across regions and asset classes." Nybo says that trading systems covering multiple asset classes enable traders to seek alpha more effectively. "It enables traders to use more-complicated, complex, interrelated strategies without having to go to multiple screens or go and pick up the phone," he explains. Nybo adds that buy-side firms entering multi-asset trading waters will need these types of systems to see the totality of their transactions more effectively. Cross-Asset Needs Russell manages more than $220 billion in assets and trades across several different asset classes. But the firm has typically used a variety of systems to manage and execute those trades. Trade order management is mostly done with a Charles River Development System (CRD), according to DuCharme, the firm's manager of business operations in foreign exchange. But he adds that additional vendor systems - such as ITG Triton or TradeFactory for equities and fixed-income trading - support and interface with the CRD OMS to cover all trading activities. "We also have our own proprietary system for dealing in FX and connecting to various vendor systems," says DuCharme. But Russell had reached a crossroad with its execution management capabilities, DuCharme notes. "We were looking to bring that into one platform as an effective, efficient way to trade across asset classes," he explains. So the firm recently evaluated execution management systems (EMSs) and selected a solution to serve as the foundation for its multi-asset trading capabilities. Though Russell signed an agreement with an EMS provider, DuCharme declines to name the system as the implementation was not complete at press time. The timing is right for bringing in a single multi-asset platform, DuCharme asserts, particularly in the area of FX. "As allocations to international assets grow, foreign exchange trading and exposure management become increasingly important components of a firm's process," he says. "Many investors don't manage FX as effectively as they could. An integrated OMS and EMS will give us increased opportunities to access the market more efficiently and at lower costs for our clients." [Ed note: For more on the EMS/OMS convergence, see the special report, page 18.] Russell initially will begin trading equities and foreign exchange on the single EMS, but that can and will be extended out to other asset classes, according to DuCharme. "Equities and foreign exchange are the first to move in this direction, with the focus on getting efficiencies and low-cost solutions in place. But we plan to expand that into derivatives and fixed income as well," he says. "The single platform allows traders to see many dealers and electronic destinations in a single view, which helps them to access the best price at the time of the deal," DuCharme continues. Previously, traders had to tap separate systems to access prices. "A single platform will reduce the amount of real estate on computer screens, and it's more efficient compared to separate systems," he adds. Realigning the Desk Russell's move to a single platform to trade across multiple asset classes also has brought about changes on the trading desk. "Our traders are much more integrated," says Battye, Russell's director of currency management. "And the platform we're moving toward provides us with greater synergies between asset classes." Battye adds that there are many advantages to having more close-knit trading teams and the ability to trade across asset classes - from better risk management to better transparency and better performance reporting. "We've always enjoyed those advantages. Now we can also achieve the operational benefits from a consolidated platform," he says. "We'll maintain dedicated teams for each asset class, but there will be a commonality of systems," Battye continues. While the teams physically sit close to one another and there are a lot of interrelationships among them, Battye says there are enough differences and nuances to each asset class that the teams still need a dedicated trading focus. "But cross-training and sharing of resources will be key," he stresses. DuCharme adds that it's important for asset-class teams to understand what each of the other groups does and have knowledge of those assets. Ed Harvey, trading manager at Rosenthal Collins Group, a futures commission merchant that actively trades across asset classes, says his firm is creating teams around sharing asset-class expertise. "We have teams of people working in individual asset classes and then looking to cross-asset trade," he says. For example, the fixed-income group would include a risk manager, a quantitative analyst and a developer, or at least three team members with those areas of expertise, Harvey adds. "Then you have a second team that would trade a second asset class. And the goal is to end up with four of five teams made up of those areas of expertise," Harvey explains. "Once they successfully reach certain goals and profit levels, then we have them cross into other asset classes." Harvey says it's important that the trading teams understand a single asset class and can trade successfully in one area to start out, then they can share information with other groups and start crossing over into other asset classes. "It's a team structure, but the idea is to build a foundation around the area you know best and then branch out," he relates. "Then at the end of each day or week, the heads of teams will sit down and talk about the different dynamics of each asset class and share ideas and maybe help other teams understand their asset class better." Rosenthal Collins uses Progress Apama for cross-asset trading strategies, testing and execution, according to Harvey. "We also use outside products, such as MatLab and Excel, for some of our modeling," he adds. The New Trader? Morgan Stanley Investment Management is upping the cross-asset ante even more for its traders. Rob Shapiro, the firm's executive director of trading and execution analysis, sees a trend among traders themselves at both buy- and sell-side firms to have the ability to trade multiple asset classes. "The demand for traders that can trade across a company's entire capital structure is going up," he says. "These traders are going to want consolidated tool kits to achieve an efficient work and process flow." TABB Group's Nybo agrees. "We're definitely seeing more and more diversification of expertise in the trader's seat," he says. Shapiro points out that the multi-asset trader trend is taking hold across the industry. "In a broader context, the convergence between long-only and hedge fund money is accelerating," he explains, noting that Morgan Stanley's trading desk has evolved to suit these purposes. "Our traders all sit together, and there is definitely a strategic mandate in place to have our traders gain multi-asset proficiency," says Shapiro, adding that the ideal trader can trade for anyone, anywhere and in any asset class. Morgan Stanley Investment Management relies on the LongView 2000 OMS and currently uses a combination of Bloomberg EMS for single-stock and ITG Triton EMS for program trading, according to Shapiro. He says his firm looks to the vendors to be strategic partners. "We want to leverage our strategic partners and learn from them," Shapiro comments. Efficiency Drives the Trend While every investment management firm has its own trading DNA, Shapiro sees the broader trend toward firms using multi-asset global platforms picking up speed. "With the proliferation of ATSs and applications associated with these trading systems, there is very much a stealth screen turf war that has been intensifying," he says. Add on top of that trading in foreign markets and asset classes beyond equities, and limited screen space is driving the need for single platforms that allow trading across assets and geographies, Shapiro contends. TABB Group's Nybo says that cross-asset trading needs depend on the firm type and trading strategy, but most of the smaller firms likely will stick with their broker-provided EMSs. Larger firms will be the ones to make the leap to invest in vendor systems with significant features and functionalities. "It all depends on the size and complexity of the firm's operations, their strategy and the needs of the traders," he says. "If a trader is dabbling in cash equities or derivatives domestically and the equity markets overseas, he is, perhaps, best served by a broker EMS. If they're only doing a handful of trades a day, they aren't going to make a large investment in a dedicated system." Nybo adds, however, that as firms trade more in multiple asset classes, their needs might lead them to a broader vendor system. "As volumes grow, they need systems with real-time monitoring and risk management capabilities across asset classes," he says. "The target for the large, multi-asset-class trading systems is large institutions with significant flow and global operations." The reality for smaller firms, though, is that they've grown up in Excel and will use it as long as they can. They might move on to a broker EMS as their needs and complexities grow, and eventually they might start thinking about better risk management and an OMS to handle cross-asset trading, Nybo says. While cross-asset trading is still in its infancy, the trend isn't likely to abate anytime soon. As firms seek higher returns abroad and in more-complex asset classes, more and more trading will be moving to single platforms for more efficient, consolidated views; better risk management; and of course, greater alpha. --- Selecting a System When Russell Investment Group's Michael DuCharme went out to the market to find an EMS to trade across multiple asset classes, he wanted to know firsthand what his peers were doing. "We spent time talking to similar asset mangers," he relates. So what criteria were most important? According to DuCharme, in addition to cost and functionality, considerations included the EMS' reputation in the marketplace and the brokers, banks and destinations to which it connects. -C.M. --- advancedtrading.com Multi-asset trading is sweeping the Street: advancedtrading.com/showArticle.jhtml?articleID=169500454 Even exchanges are looking to get in on the multi-asset action: advancedtrading.com/showArticle.jhtml?articleID=196900783 Copyright 2007 CMP Media LLC. All rights reserved. Copyright 2007 CMP Media LLC |