Where do you see most demand for multi-market and cross-asset trading?
Lee: The biggest growth area we see is Asia,
both US and European firms into Asia and Asians into Europe and
US. We've seen a large growth in interest in Asia from US firms
recently. There is much anticipation of growth in China and the
Asian region in general, bringing a surge of interest from
outside the region.
Thornberry: Hedge funds have been doing cross-asset trading for alpha capture for some time. In London, we see a number of proprietary trading firms exploring both new markets and relationships across markets. Vendors need to respond with solutions that service this, not only with flexible execution tools but also, for example, with data centre access to support clients' connectivity requirements.
Geraghty: Traditional asset managers, notably pension funds, are perhaps slower to move than hedge funds. Also some instruments and technologies are not yet authorised by the funds' investment committees. But the picture is changing fast.
Sammann: We see this demand from various buy-side client segments - hedge funds, institutional clients, prop shops, CTAs and retail. As an exchange that provides trading in multiple asset classes on a single platform, we see customers moving from model-based trading in FX to interest rates or expanding their trading activities from a single asset class to others such as equities or energies. Hedge funds and prop shops have been most active in this space, but more and more institutional and retails clients are now adopting multi-asset class trading strategies.
Left to right:Chris Hall,Automated Trader; Derek Sammann,CME Group; Larry Geraghty, MF Global; Mark Thornberry,RTS Realtime Systems; Chris Lee,Fortis Global Clearing
What are the difficulties firms face as they expand the asset classes they trade in?
Lee: From our perspective, I'd say it's
important for firms to find a clearer that can manage trades in
different asset classes and markets across the globe, i.e.
provide the necessary net liquidity information and support
cross-correlations against similar products/instruments, in
regions where this is allowed. In a global cross-asset class
world, the demand is for amalgamation of the multi-asset products
into one statement and one relationship. The timing of producing
this sheet, when processing could take place in different time
zones, is a big challenge. Risk and operations often are more of
an issue, when trading cross-border and cross-product, than the
execution of trading itself.
Thornberry: A couple of issues spring to mind. First, demand for multi-asset trading from a single screen is a huge challenge for vendors. Displaying prices is one thing, but providing integrated decision support tools or risk is another. Furthermore, a 'global' front-end must be able to handle trading on specialist exchanges such as the LME, for example. The second challenge is connectivity: not many vendors can connect to 90+ exchanges. And when, as recently happened, four major exchanges upgrade their systems within a very short time period, that can add a lot of pressure to vendors.
Lee: A few vendors can handle stocks well and a few can handle derivatives well, but far fewer can handle both stocks and derivatives. You then have to consider the matter of connecting to all the Asian exchanges. The back office issues add a whole new dimension.
Chris Lee,Fortis Global Clearing
"Risk and operations often are more of an ssue, when trading cross-border and crossproduct, han the execution of trading itself."
Geraghty: We see a lot of interest in both
algorithmic and automated trading, but many products aren't ready
yet especially from a risk and tracking error perspective.
Pension funds, with fiduciary responsibilities beyond those of
hedge funds, want to see more history before departing from their
tried and true execution practices.
Is market data one of the biggest challenges as the market becomes increasingly cross- and multi-asset?
Thornberry: Market data volumes are doubling on
a regular basis, so the market needs to focus on coping with this
increased throughput. From a non-automated trader's perspective,
they can only digest a certain amount of updates per second -
whilst from an algo trader's viewpoint, real-time data cleansing
is essential to ensure no erroneous trade decisions.
Mark Thornberry, RTS Realtime Systems (left) and Chris Lee, Fortis Global Clearing
What are the big regulatory challenges when trading on a cross- and/or multi-asset basis?
Lee: Even if you're a firm operating purely
within the US, you have two regulators that work in different
ways. As soon as you look outside, you're quickly faced with half
a dozen or so regulators operating with different views, business
cultures and languages. Ideally we would have all our memberships
in one entity. In reality, you can't run a global trading
operation as a single entity; you need different companies in
different regions and/or countries. With firms that trade on a
cross-border, cross-asset class basis, the clearer needs to
establish where they want their statement from, where they want
to hold their money, and various other regulatory-dependent
issues, before we can even consider the risk and connectivity
Geraghty: Regulatory issues vary across asset classes. Asset managers choose to hold some assets in local currencies and to hedge the currency exposure for other assets. However, feeding this into their risk management system, and keeping on top of tracking error can be a big problem. Moreover, portfolio managers use a variety of strategies within the currency class, such as carry trades, arbitrage and trending markets. The multiple layers of strategies will require unique technology to provide optimal transparency.
How is growth in cross- and/or multi-asset trading changing buy-side firms' demands on suppliers?
Derek Sammann, CME Group
"Some firms are chasing alpha by going high frequency, while others go to the more complex end of the market, i.e. looking at correlations …"
Sammann: Some firms are chasing alpha by going high frequency, while others go to the more complex end of the market, i.e. looking at correlations between FX and interest rates, for example, or correlations within the same asset class, i.e. FX futures and options. As an exchange, we need to be able to support risk management but also provide liquidity by attracting a number of different participants across multiple instruments. CME Clearing House provides risk calculations via SPAN, and uses these as the basis for margin requirements for various underlying products. Execution costs and the price of accessing liquidity are crucial. Exchange consolidation makes sense when clients trade across markets and focus on the all-in costs not just the spread. The more products we can provide on one platform the lower cost we can offer to clients. CME is primarily a technology company and we put a lot of our capex into our systems and technology to continually add functionality and execution speed to our systems.
Lee: Clearing clients that want to trade on a
cross- or multi-asset basis want a global clearer rather than
ones that specialise in one market or location. It's getting much
harder for smaller clearers to risk manage clients consistently
across multiple markets. Clearers need to be able to get trades
back to clients in real time and to make sure that clients have
their statements when and where they need them, according to
their particular business model. We're finding a need for us to
work increasingly closely with our clients.
Mark Thornberry, RTS Realtime Systems
"… the big issue is how to handle pre-trade risk management and the latency overhead …"
Clearers must follow clients into the markets they want to trade
in. As such we've expanded our FX capabilities and established a
specialist energy business a few years ago. Algo/auto trading
makes it easier for clients to enter new markets and clearers
need to amalgamate trades in these markets into their risk
management and back-office systems - not nearly enough attention
is being paid to the back-office implications.
Thornberry: Firms increasingly want fast access to marketplaces as well as access to market data. We've rolled out our data centre solution in order to take away some of the burden from clients, connecting seamlessly to both cash and derivatives markets. From a risk management perspective, there is already a lot of post-trade risk reporting and analysis capabilities, but the big issue is how to handle pre-trade risk management and the latency overhead, especially for the high-frequency guys.
Geraghty: One change is that clients' needs are going beyond a single institution, which means we have to increasingly work together with other firms to manage the needs of clients with global trading books.
Derek Sammann, CME Group (left) and Larry Geraghty, MF Global
What should firms be asking themselves before trading in new asset classes?
Thornberry: They need to ask their vendors what
connectivity they can offer now and their commitment in the
future - especially as alternative liquidity pools spring up,
with often uncertain levels of market acceptance. In London,
there is increasing interest in trading some of the emerging
markets in Asia, with India coming into sharp focus. Vendors need
to support interfaces that reflect local market practice. Another
big issue is handling the sheer amount of messages involved in
trading in multiple markets on an auto/algo basis, because the
messages-to-fill ratio is rising significantly. This is a
challenge both for exchanges and vendors.
Larry Geraghty, MF Global
"… investment committees will be asking managers whether the new assetlass truly produces alpha that can be ported to parallel portfolios, …"
Sammann: The questions that our customers must
address should be: do we have sufficient tools to quantify and
successfully risk-manage diverse, multi-asset class risk
positions?; do we have sufficient IT resources to fully quantify
the risks in these positions and manage executions quickly enough
in all markets?; can we effectively quantify the alpha required
to pay back our technology expense to make the IT development
Geraghty: While the costs of moving into new markets and asset classes may be high, the opportunities afforded by cross- and multi-asset trading make the investment worthwhile. However, investment committees will be asking managers whether the new asset class truly produces alpha that can be ported to parallel portfolios, if the risk undertaken increases or decreases the risk profile of the total portfolio and, most importantly, whether the back-office support systems are sufficiently robust to support the products or product combinations.
This article is an edited transcript of a panel discussion on cross-asset trading held at the Futures Industry Association's Futures & Options Expo 2007 event at the Hyatt Regency Hotel, Chicago on November 28, 2007