In February 2018, Cathy Gibson joined Royal London Asset Management (RLAM) in London to establish and lead its new centralised dealing desk, covering all asset classes, but primarily focused on equities and fixed income. The move marked a significant shift in scale for Gibson, having previously headed up the fixed income UK business for DWS (Deutsche Asset Management).
While the two firms have different resource pools available to them, the similarities between the two roles are that Gibson was handed the responsibility to build the desk up from the ground on both occasions and it was the strength of diversity and spirit of collaboration within the trading team that Gibson most wanted to bring to the RLAM operation.
RLAM already possessed a depth of experience and skill on the equities front, so the first challenge required to bring the fixed income capabilities up to the same level, and Gibson says that she was very conscious to bring as varied a range of skills sets on board as possible.
“We were able to hire on both the equity and fixed income sides, which gave me the opportunity to diversify my desk in terms of both a gender and skill set perspective,” she says. “We were able to bring in people with skills that we didn’t have here before. Being able to watch that merge and integrate over the last 15 months has been fantastic.”
Gibson believes that the blend of experience the firm already possessed in conjunction with fresh blood and skills means the desk is “much stronger now as a result” and was helped by physically locating both the equities and fixed income teams in one place. While the desk is very much a cross-asset dealing operation, Gibson wants to preserve the individual experiences and talents that each member of the team brings to the table.
“We have subject matter expertise and they diversify across that, so I don’t expect fixed income traders to be trading equities and vice versa, but a fixed income trader can trade an equity future as easily as they can a fixed income future, for example,” she explains.
“There is definitely crossover in terms of what they can do, but I believe in having that expertise and specialisation within the trading desk. The challenge is bringing those together and making sure it works.”
Bringing new talent to the desk has also created opportunities for RLAM and its trading processes. Gibson details how one new hire with significant experience of equity algo trading has been handed a remit to assess the firm’s options in algorithmic trading and what is available in the market, while another hire came from a firm which had a high level of segregation between high- and low-touch trading.
“Using her background and expertise we were able to introduce low-touch trading to RLAM for the first time ever,” she says. “We are still at the conservative stage, it has been tried and tested, and we will roll this out across all asset types.”
Segregating job roles was also one of the biggest tasks facing Gibson in the creation of RLAM’s new-look desk, particularly when trying to foster a culture of valuing individual skills and ownership of each role within the team, something that can be a challenge in what she describes as a “very flat structure”.
That segregation primarily refers to the roles of the traders and portfolio managers, which Gibson points out was already in effect before she joined the firm, but was still a relatively new feature and one that had not been rolled out across asset classes. Gibson says that this has now been extended across the desk’s multiple asset operations and that although one would expect there to be “bumps in the road”, RLAM encountered very few of these obstacles: “That is really a testament to the traders, but also to the portfolio managers in their ability to trust their trades with the people on the desk,” she says.
The relationships between buy-side traders and portfolio managers has been a shifting dynamic through increasing use of technologies on trading desks and changing market structures, and RLAM is no different from any of its peers in this respect. Gibson believes her own traders and portfolio managers are particularly close on the high-touch channels – although there is of course dialogue for less liquid-type assets – however, she sees the low-touch side as the opposite.
“I actually see there probably being more and more distance between the portfolio managers and cash flow management, small trade allocations and small futures,” she explains. “I see portfolio managers being very separated from that, mainly because they don’t need to be close to it and, ultimately, I would see a lot more automation of trade flow in that space.”
Regardless of the type of security or the distance between traders and portfolio managers, communication will still be a key element of each particular strategy. Gibson recalls her time with Bank of Ireland’s Global Markets division – her only stint on the sell-side – as being particularly beneficial when it comes to managing the role of her portfolio managers at RLAM.
“When I returned to the buy-side I very much looked at my portfolio managers as my clients and valued them as much as I did my external clients when I was on the sell side”, she says. “That was actually a sea change, in terms of how they were used to being treated, and it is very much the culture that I try to instil in our team; that your clients are sitting behind you. Ensure there is segregation and challenge where needs be, but our end game is the same, the best possible client outcome.”
Bringing these types of experiences to building up new trading desks has helped to smooth out the transition – Gibson says that the process of building out the RLAM desk was a far smoother process than she or the business believed it might be – and this was largely down to the collaborative approach between the equity, fixed income traders and fund managers.
Gibson says such collaboration and teamwork between the dealing desk and portfolio managers, reviewing trading strategies and results, ensuring there is an ongoing dialogue between both sides and being willing to learn from each other has led to better end results, for example in RLAM’s passive operations where she says the team has looked at execution strategies aimed at reducing tracking errors.
“What I would like in future is for that to naturally expand out between the portfolio managers as well, because we have brought them together as well for the first time,” she says. “We have one investment floor with the dealing desk essentially in the middle and the idea behind that was to not only bring the traders together, but to bring the portfolio managers across assets together. The bottom line is that in some cases they are covering the same names, they are just doing it from a different angle.”
Gibson recognises that while much of the initial foundations have now been successfully laid for RLAM’s dealing desk, or are at least now at the bedding-in stage, there is still much work to be done both internally and at an industry level. The wider ongoing attempts to address the diversity issue have yielded mixed results so far, but Gibson illustrates her own challenges with establishing greater diversity in RLAM’s trading team, namely the “double-edged sword” of striking a balance between attracting diversity and turnover within a company.
It’s not an easy problem to solve: If people don’t want to leave the firm then you must be doing something right, but it becomes that much harder to introduce greater diversity into a team or company, particularly for mid-sized firms with more modest resources than their larger competitors.
Despite this, Gibson believes she has had a success in this space in her first 15 months within RLAM by bringing in greater diversity in terms of gender, background and skill sets; the “stuff you can’t just put down on paper” that are particularly important for trading teams when it comes to managing relationships, both internally and externally. It’s a formula that Gibson is optimistic about for the future of the company.
In terms of continuing to attract generation of diverse work force into the industry, Gibson says: “I want to drive home to the next generation that this is a real value-added service that we are providing with a potential for really positive social impact, whether that be helping secure someone’s future financial security or the growth of ESG and sustainable investment, that’s how I think we can attract more diversity into this business,” she explains. “I would like to help drive this through the various different trade associations and I would be very pleased if we can make some significant in-roads into the space.”
The desire to increase diversity levels on RLAM’s trading desk is also informed by the increasing complexity of market and trading conditions, meaning new perspectives or strategies can make a difference in execution outcomes. Whether executing via electronic or voice channels, Gibson points out that the sheer number of factors each trader must now be aware of throughout the trade lifecycle has greatly increased.
For example, if a trader decides not to get a competitive price on a trade, there will be implications downstream from a best execution evidencing perspective. This, Gibson states, is just one of a host of considerations traders must be aware of when it comes to the logistics of trading from an operational point of view, as well as how it fits into the desk’s strategy.
“If you are trading a less liquid US high-yield bond, for example, is the bond traceable? If the bond is traceable, do I really want to do a scrap of 500K of them when I know that is going to print in 30 minutes? And if I do that, am I giving away sensitive market information? Should I just wait to get a block done and not let any information get out there? These are all decisions a trader has to make in a very short amount of time,” she says.
While there are utilities to aid traders in these situations – the TRAX and TRACE data repositories in Europe and the US fixed income markets, for example – Gibson says that the real value is having the subject matter expertise on the desk, because “you can’t expect one person to understand the nuances of the entire spectrum of the market to the same degree.”
The change in market conditions has undoubtedly been accelerated through the introduction of MiFID II at the start of last year, in conjunction with the increasing electronification of trading and available data. These three factors – not to mention harder to define elements, such as Brexit – mean that buy-side firms such as RLAM must be better prepared to adapt than ever before.
Much like its peers, RLAM is embracing developments in technology and data to aid traders and the desk in general as much as possible. The firm appointed a new head of data strategy last year to bolster its capabilities in this area and Gibson says this will be an ongoing focus for RLAM, to create tools and resources that aid both the trading and investment processes, as well as enhanced client reporting.
Gibson says that it would be “out of touch” to say that its data is where she wants it to be, because “that space is changing so much that it’s never going to be a case of being done with a full stop. It will always be an ongoing process for us all.”
Likewise, the adaptation and adoption of technology creates its own set of issues. While the buy-side in general are happy to espouse on the new opportunities technology can provide, Gibson takes a slightly more pragmatic view of the issue, informed by the position of RLAM as a “traditional asset manager”.
“We are not technologists, that is not our subject matter expertise, so for us, it is a matter of buying solutions rather than building them ourselves,” she explains. “Even when you buy solutions you still need to have the knowledge associated with it, because someone has to evaluate 10 different execution management systems, for example, to come up with the best option.
“With most technology there is no single best provider out there, you really review what you have internally and try to find the best fit. I would love to say that most technology is plug and play, but unfortunately it’s not, so there is a lot of cost involved.”
That is not to say that Gibson doesn’t see the advantages and opportunities that technological development can offer to the buy-side, and she says that she is fascinated by the evolution of artificial intelligence. RLAM currently utilises for some of its quantitative models, although there is still a long way to go until AI can be used as an outright investment decision-making tool in the active space.
“For me, the fundamental issue in the investment space, especially when you step out of the passive or quant-drive investment strategy is that markets aren’t always rational”, Gibson says. “It’s very difficult for AI technologies to capture the irrational part of the market and, arguably, humans are better placed to do that.”
While technology may be able to bring some level of clarity and optimisation to trading processes, much of this development is being driven by changes in the regulatory environment. MiFID II has had around 18 months to bed into the European markets but remains the key factor for determining market complexity, buy-side strategies and technology implementation.
Gibson highlights how regulation is impacting on how the firm approaches its use of technology and the implementation of new solutions, particularly challenging when compliance itself is not static, or as she puts it, “a living, breathing piece of regulation.” One example is changes around trade and transaction reporting, where even minor alterations to data fields can open up significant compliance concerns.
“Those pieces of regulation mean that the burden of regression testing on any changes you have made has gone up, which in turn means that the costs of on-boarding and the risks go up,” she says. “Those are the challenges that we are facing, but that is an industry-wide challenge.”
Like most other heads of trading desks throughout Europe, Gibson says MiFID III is “just a matter of time” and that so far, at least, MiFID II has only been able to achieve its objective of increased transparency to “a very small extent compared to what could have happened and ESMA is aware of that.”
Ultimately, regulatory change is a fact of life for asset managers and, in conjunction with their trading objectives, this is where the subject matter expertise Gibson prizes at RLAM comes to the fore. It’s a role that she has aimed to take on herself throughout her career, informing what Gibson describes as the biggest lesson she has learned from her career to date – to always aim to make yourself dispensable.
“You need to take on a role or function, become a subject matter expert in it and then you need to ensure you can pass that on to your team, to make sure that the workflow and process is in place, and then you can move on to the next thing,” she explains.
“That’s better for your team because they are continuing to increase their ability and knowledge. It’s better for the company because they don’t have key man risk. It does sound counter-intuitive, but I genuinely believe that it works for the team, company and individual.”