Why wait for multi-asset functionality?
Michael Levas, founder and director or
trading at Florida-based Olympian Capital Management, says multi-asset trading
is already well supported by brokers and vendors.
TRADE USA: Bearing in mind the old joke that ends with the punchline, “I wouldn’t start
from here”, should the buy-side trader that has committed to a particular
equity trading system put his hand in his pocket again to invest in multi-asset
Michael Levas: If you’re a firm of long-only managers, managing mutual funds and trading
large cap growth, you’re obviously not going to buy a multi-asset trading
platform, but the minute that you start trading more than two of the asset
classes, you need to look at it.
You can perhaps add fixed income to the desk without making that
leap, because the fixed income market is still essentially an over-the-counter
market; it hasn't had the full electronic input of equities or FX. But once you
get the point where you're long and short equities and you're trading two or
more asset classes, I would recommend that you have a multi-asset trading
platform. Just managing the workflow itself in that environment, having
multiple traders and trying to call all the right people at the right time can
be a very tedious. The most prudent thing obviously would be to have a platform
that gives you access to those asset classes.
TRADE USA: Let's
say you've got an equities trading platform suits your needs perfectly. Can you
find a multi-asset platform that will replicate the functionality that you are
attached to or is it inevitable that you’ll have to give anything up?
Levas: I think you can [replicate], absolutely. There are a number of
platforms out there that have been expanded so that you're not giving up
anything you had previously. In fact your functionality will be enhanced because
of the extra data and flexibility you receive. Obviously the firms that are creating
these multi-asset trading platforms are focused on ease of use and
TRADE USA: Where
are US buy-side firms on the journey from single-asset to multi-asset trading
Levas: Multi-asset trading has been around for a little less than 10
years. You've had quite a significant expansion since then with the
proliferation of the hedge fund industry, macro funds and multi-asset funds.
If you're a hedge fund and you're trading more than one class,
you're almost certainly using a multi-asset class trading platform. Before
that, proprietary desks at some of the large investment banking firms obviously
had to use multi-asset platforms as well as they'd have been in situations
where they' had to hand off a trade to a colleague or something happened in one
area that required a rapid reaction in an adjacent area.
TRADE USA: Trading
electronically, can you get equivalent functionality in each asset class?
Levas: Yes you can, but it all depends on the prime broker you're
utilising and the type of inventory they have. In the fixed income market, for
example, there would have to have a certain amount of inventory in-house to be
able to sell to you or they’d need to be able to get it quickly. There might be
times when you're interested in a certain bond, you put the CUSIP (Committee
on Uniform Securities Identification Procedures) numbers
in and your prime broker might
not have it in their inventory, but a bid and ask will always come up at some
point and often they would get that bond from another broker dealer that does
have it in their inventory. We’re able to get that functionality through the
prime brokerage firm that we use.
TRADE USA: How are today’s systems able to handle cross-asset class trading?
Levas: Let’s take the example of cross-exchange arbitrage. This happens fairly
often in the commodity markets where you can be trading a commodity on
different exchanges and where there can be an arbitrage between them. Another
example might be the two major gold ETFs in the US: the GLD and IAU. A few
years ago, they were essentially running neck and neck, but there was an
arbitrage between them, somewhere in the region of 3-5 cents. Even though they
were supposed to reflect the current price of gold, that arbitrage was still
there. A trader would take advantage of that. The IAU then went for a 5:1 split
and brought the pricing much much lower. They did that for a number of reasons,
some regulatory and some to open it up to smaller investors.
We also do commodity arbitrage across markets. Let's say we're
trading Brent in London and Brent in the US. Sometimes there could be a slight
arbitrage in that or you might want to be short Brent in London and long WTI in
the US. A multi-asset trading platform allows you to take advantage of these
situations in a way that you couldn't do before.
TRADE USA: From
your experience of Olympian, what are the headline lessons for peers that are now
setting out with a multi-asset approach?
Levas: One lesson you’ll learn is that it requires more intense
concentration to trade in this way. Obviously if you're running multi-asset
classes at the same time in one portfolio, you have to be more attuned to
what's going on in all of those markets, so the level of concentration needed is
high and being on your game is of paramount importance.
Reporting by Richard Schwartz