Eurex
Ahead of the Eurex Derivatives Forum later this month, we caught up with Katrin Petersen, Head of Distribution at Barclays and Manuela Arbuckle, Director of Prime Derivative Services Sales, to explore the rise of Multi-Asset Trading and how they are adapting to it.
What's driven the popularity of multi-asset trading?
Katrin: The advantages of the multi-asset concept on the buyside are that dealers have a streamlined and dedicated single point of contact for execution. You also have a lot of shared experience on how and where to get the best liquidity and execution. If you combine all that together, you are very likely to have a better understanding of market trends and also the correlations between each asset class.
It is also an efficient way to manage market movements and shocks. You can react quickly on functions such as hedging if you have visibility on all class classes together at the same time.
For OTC derivatives, and bilateral trades in particular, given the challenges that come with a bilateral trading set-up, like discounting and initial margin, it is important to have a multi-asset trading desk which knows what is important for execution and how to manage the process.
You can also optimize your human and financial resources. The structure can create better collaboration between single teams — generating better ideas and better risk management.
Among our buyside clients, we are also increasingly seeing the emergence of micro cross-asset class trading desks. These are structured to focus traders’ activity on certain products, but also allow for them to back up other traders when needed.
For example, this could constitute a desk that combines the fixed income and OTC ecosystem, with traders running bonds and derivatives for asset classes like credit and rates.
FX still sits a bit in between other asset classes, probably tending closer to fixed income. And then you have exchange-traded desks where equity cash and equity derivatives are combined.
Is technological change a factor in this trend? Does electronification influence how some firms view their trading structures?
Katrin: Some clients are creating trading desks through a differentiation of electronic vs manual i.e. a non-touch environment and a high touch one. This then leads to the creation of a cross-asset e-desk by default, however high touch is generally very asset class aligned.
Market structure in rates and credit has evolved towards electronification, driven by more transparency, more clearing and more need for quantitative analysis of pricing trades and building orders. Eurex has played an active role in this trend, expanding its offering in credit trading, for example.
This has been equities’ bread and butter for many years. The rates and fixed income markets now demand the same quantitative skill sets. So, firms are seeing how they can repurpose internal knowledge for managing that type of change.
Regulatory change is also very important, with requirements like best execution and greater transparency applying across all asset classes. Firms increasingly need to understand that impact across asset classes.
How has Barclays adapted to the rise of multi-asset trading?
Katrin: You are unlikely to see this level of multi-asset trading and sales desk integration at Barclays in the near future. The depth and specialization of coverage that we provide for our clients, not just client service and sales specializing in different asset classes to provide in depth market intelligence, but also our trading desks managing the level of risk and volumes that we process, cannot be done this way.
Taking credit trading for example, we have specialists for high yield, for emerging markets and for investment grade further split down into certain sectors and maturity buckets. There are also limits to what can be hedged on a cross-asset basis.
That does not mean that the sell-side can only act as a grouping of different silo types. We need to react to our clients’ decisions both for relationship and strategy. That means considering the multi-asset trend in more detail.
So, we are coordinating more between teams and discussing how we can adapt our service to the trend, with close interactions on market structure, for example. We hold discussions with the relevant trading desks regularly.
For us, the key factor is servicing our clients. If they are active in several asset classes, then they will always need specialists for whatever they trade.
And truly merging a sales desk to be cross-asset class is difficult, unless the flow is quite narrow and sporadic, or small.
Manuela: Barclays functions as a service provider to end clients. So, it is hard for us to move the same functions together because clients are expecting specialist salespeople. Whereas on the buy-side, scale and the cost-savings from moving desks together are more of a driver.
While I agree it is not possible to be truly cross-asset in an organization our size, I think there is an opportunity to push for some “cross-asset” approaches: the recent move of fixed income financing in liquid financing is a good example. While we are to an extent siloed due to specialization, our approach to servicing clients is naturally cross-asset, especially in financing. There’s a lot to be done here, with the electronification agenda and being able to service clients and to understand their cross-asset needs. This means we need to be nimble in order to mobilize those “silos” in the most efficient way for the client and for our own efficiencies, such as balances, RWA and netting, for example.
Is there any differentiation across the buy-side in how they approach multi-asset trading?
Katrin: What we have been describing is our coverage model for large asset managers, who are very active in all asset classes. When it comes to coverage of smaller insurance companies or pension funds, the dynamic shifts.
These clients often don't have a trading desk at all — portfolio management and execution are all handled by one desk.
They don’t require the same level of specialism and we adopt our coverage depending on which asset classes they are active in.
Is this increased popularity of multi-asset trading having an impact on trading strategies and the broader market?
Katrin: Multi-asset trading is a very important topic for trading strategies. There is one common theme that runs through all asset class — data.
Firstly, that means firms must have an excellent understanding and grasp of their own internal data. Increasingly, it also means seeking out the external data that is available and critical to your offering. Through this lens, we are seeing trading desks becoming an important resource to feed data up to the relevant portfolio managers and signals from one asset class can have a greater impact on trading strategies in another.
Join the Derivatives Forum Frankfurt on Feb 28-29 and hear more about this topic.
Speakers:
Moderator: Dan Barnes, Editor, TheDesk
