Multi-asset connectivity roundtable highlights divergent views

By Mikael Persson, VP Strategic Research
July 9, 2015

Itiviti’s VP Strategic Research, Mikael Persson, captures highlights from the recent thought-leadership roundtable held in London to examine the evolution of the multi-asset trading platform, at a global level. 

As financial markets across the globe mature electronically across all asset classes and with IT budgets squeezed, which has placed heightened pressure on firms to streamline trading systems, handling multi-asset trading has become an increasing focus for firms trading equities, fixed income, foreign exchange (FX), listed options, futures – or indeed any combination of these.

Against this backdrop Itiviti hosted a thought-leadership roundtable in London late this June with senior representatives from major buy- and sell-side institutions in collaboration with Global Trading, the FIX Protocol’s official journal, to examine the evolution of multi-asset trading at a global level. Central to the debate was whether achieving a truly consolidated multi-asset platform is indeed achievable and actionable.

For many firms it can clearly make sense to consolidate trading of asset classes on a single platform and to find the best solution to that end. However, it’s not an entirely ‘one-size-fits-all’ proposition as evidenced by some responses heard at the event – even if ‘connectivity’ from a few years ago might have evolved from a small ‘c’ to a capital ‘C’ and become much broader in scope.

Different firms – on both the buy- and sell-side – are nevertheless looking at how they might implement and deploy systems to create greater efficiencies in trading across asset classes and improve trade lifecycle workflows. But at the end of the day though much will be driven and defined by client demand.

Key topics in the expansive discussion, which was moderated by Edward Mangles, Regional Director, Asia Pacific, FIX Trading Community and a Global Trading director, covered among other things the role of changing technology in breaking down silos between asset classes; the evolution of buy-side technology; the changing role of the sell-side and how firms need to stay at the forefront of IT to meet changing needs; and, on-going regulatory impact.

Large buy-side firms have or are in the process moving to cross asset-class trading desks, even if the landscape is not an entirely even one. The usual configuration consists of an ‘Equity’ and ‘Listed Derivatives’ desk on one side and a Fixed-Income and Currencies (FIC) business desk on the other. Both desks could be headed by a global head of dealing role. This means they revisit their connectivity with global brokers.

Recent research from Greenwich Associates (Jan 2015), which canvassed over 350 buy-side traders worldwide operating on equity, fixed-income or FX trading desks, has nevertheless revealed that buy-side firms have been moving away from using multi-trading class trading systems. That said, this was despite the development of multi-asset desks and huge investment in their development from vendors.

While Greenwich’s research found that 68 percent of traders are now operating across equities, fixed income and FX, they appeared more concerned about cross-product coverage than an ability to trade multiple asset classes via a single platform.

Opinions expressed by attendees at this event certainly differed on the extent of multi-asset trading and IT take up in pursuit of this holy grail. One executive at a leading agency broker noted that the buy-side has gone from having very siloed desks across the asset classes and they’re starting to combine those desks”.

They added: “Whether the technology is there or not today, it’s definitely moving in that direction and we’re starting to see more demand from the buy-side and investment is starting to be real in those areas.” And, while not all firms might not necessarily be at maturity as regards multi-trading system capability this participant at least contended that it was a “direction” of travel many were heading in.

One head of fixed income at a leading UK asset management house revealed that while his firm had looked at trying to have a more multi-asset trading desk a few years ago, they concluded that “it just wasn’t going to work on the basis that the markets are still so specialized.”

Whilst the firm was not siloed, they were using different systems and using them in different ways. This senior executive noted that given how rapidly the marketplace is changing within the fixed income space they felt there “isn’t one size fits all.” They also “did not envisage they would have a central trading desk with equity and fixed-income traders in one place in the near future.”

Indeed, with such specialized trading in certain asset classes and different trading protocols being used across all the different products besides equities – from Interest Rate Swaps (IRS) to Credit Default Swaps (CDS) and from cash bonds to government bonds, illiquid high yield as well as emerging market products – one can appreciate their point.

Another participant, who has worked across a wide variety fixed income and equities desks in an IT capacity, questioned too “how much desk integration one really wanted.”

The evolution of regulation in financial markets is also pushing buy-side institutions to reconsider their approach to critical subjects like ‘Best Execution’ in order to ensure the protection of investors. As a result the role of buy- and sell-side institutions is evolving. And, it was noted that sell-side firms could act more as “execution consultants” to the buy-side.

Concerns were raised over the counterproductive effects of potentially “excessive regulation” for illiquid instruments. In particular, fears were voiced over the pre-trade transparency proposals under MiFID (Markets in Financial Instrument Directive) II that were coming in a “much more onerous” fashion and focusing minds.

On their side, sell-side firms and big routing network providers are also investing to reduce costs and bring more service consistency across multiple asset classes. They need to invest in order to meet new demands of the buy-side and expect to continue playing a major role – especially in less liquid instruments.

Fixed income is largely viewed as a different asset class from most others due to its structure. Electronification of OTC instruments is also creating new infrastructure/trading challenges and opportunities for all players.

ATS players in that field are mostly leveraging the FIX protocol in order to simplify access to multiple asset class, i.e. starting from FX and evolving into fixed-income products. Traditional exchanges are also evolving their back-ends to support more asset classes and increase their attractiveness. They increase their value offering and proposition at the connectivity and data analytics level.

Scarcity of capital due to the shrinking of principal trading was part of the concerns expressed by buy-side players at Itiviti’ s roundtable event. It increases the appetite for crossing networks and the potential ability for the buy-side to use market making type of functionality to post ‘interest’ in an anonymous manner. It also means sell-side firms will perhaps start focusing on different type of clients.

Overall, the FIX infrastructure is the initial investment made by both buy- and sell-side firms to provide the global trading backbone, which allows the evolution towards multi-asset class trading. The consolidation of instrument types on a few platforms is expected to generate welcomed synergies at a time of increased investment due to regulatory pressure.

The multi-asset trading system adoption debate is one that is likely to run and run, but clearly speaking to the right technology vendors over deployments will remain key.

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