The rising challenge of multi-asset trading

The rising challenge of multi-asset trading

By Brian Collings, CEO, Torstone Technology 

Over the years, we have seen increasing demand from financial institutions for a consolidated view of risk and reporting across asset classes.  This has been driven, to some extent, by an increase in multi-asset trading, but more so by post-trade regulation. 

As a result, back office systems can easily accommodate multi-asset class processing thanks to upgrades undertaken, unlike their front office system counterparts which have not benefited from the same level of development, or at least not to the same extent. Front office technology providers are now playing catch-up with back office systems to enable them to effectively service financial institutions which are increasingly seeking to provide multi-asset class trading.   

So what is driving the increase in multi-asset trading? Cost is the first consideration, as banks reconfigure their business models due to industry and regulatory pressures, IT and staff budgets are being scrutinized. As a result, trading desks have been rationalized and multi-asset trading teams created as a way to manage the same number of clients with fewer resources.

The second driver for multi-asset trading is that the buy-side is increasingly looking to diversify investment portfolios to include products such as derivatives in order to create greater returns. Simultaneously, pension funds and asset management firms have increasingly needed to hedge their liabilities using derivatives such as futures and interest rate and inflation swaps.  Subsequently, front and back office systems which can cope with such requirements are becoming ever more critical.

The final driver has been evolving regulation and the need for both the sell-side and buy-side to comply with new rules such as those for short selling, reporting and risk. In the long term, integrating trading across multiple asset classes is a much more effective way of ensuring compliance with the new rules rather than trying to combine trading across disparate platforms.

Unfortunately, while the imperative to trade cross asset class is there, in many cases it is still difficult to do so. The trading desks of banks were traditionally created along asset class lines and in most cases, operated as vertical silos. The creation of a multi-asset trading desk requires a group of professionals who have a broad knowledge of a diverse set of asset classes and this runs counter to past requirements.  

That said, there is a convergence  in trends affecting asset classes which is requiring those on trading desks to develop their multi-asset skills so they become 'all rounders'. For example, due to the impact of regulation, fixed income and derivatives markets are becoming more electronic and therefore are experiencing greater similarities in product characteristics such as increased standardisation. 

In addition, increasingly, heads of multi-asset trading desks tend to be product generalists, capable of imparting their multi-asset class knowledge and skills to the rest of their team.

While these are encouraging signs, the slow evolution of multi-asset trading desks can in large part be attributed to the limitations of the front office trading and order management systems which underpin them.  For example, electronic trading platforms which are currently in existence tend to focus on a single asset class. 

This can be seen currently in the fixed income market where there has been a proliferation of electronic trading platforms targeted at the buy-side. While this will of course increase efficiency in fixed income execution, it will still require each financial institution to connect to multiple platforms.  

As a result, complexity will be increased due to the use of disparate systems. Order management systems are not much better in terms of their multi-asset class offerings - while there are aspirations to provide cross asset class functionality, they are not there yet.

The story in the back office is very different. With shortcomings in the multi-asset class capabilities of front office trading systems, many institutions rely on the cross asset capabilities of back office systems, which are both more advanced and currently well equipped to provide a holistic view of their market positions.

When financial institutions conduct cross-asset class trading, they require a consolidated view of risk and reporting. In particular, there is increasing pressure on firms to have a comprehensive overview of their market position, which is accurate, up-to-date and easily accessible. This allows sell-side institutions to quickly identify their holistic counterparty and asset class exposure. 

Such multi-asset class transparency is essential in times of market volatility, and in order to demonstrate risk management and compliance procedures to policymakers and regulators.

The multi-asset class capabilities of back office systems can, in the main, be attributed to recent regulations such as the European Market Infrastructure Regulation, which was implemented in the aftermath of the global financial crisis and which aimed to improve the robustness of post-trade processes such as reporting and collateral management. 

Another element of recent regulation is the requirement for senior management of all financial institutions to have a real-time, consolidated  view of portfolios to enable them to be able to understand on demand, how potential market events will impact their risk  positions.  These requirements can only be met by having a multi-asset, automated back office technology platform in place.

Of course, over time the multi-asset capabilities of trading and order management systems will catch-up with those of back office platforms. In the meantime, the multi-asset class capabilities of the latter can help to patch up the relatively siloed systems of the former, enabling financial institutions to fulfill their consolidated risk, reporting and accounting obligations to senior management, clients and regulators. This interim solution should provide front office systems providers with valuable time in which to develop all-singing and all-dancing multi-asset trading capabilities.