Eric Boess, global head of trading at Allianz Global Investors (AGI), is a busy man. He has been in the role since January 2016 and the last two years have not allowed him much rest. Apart from the usual concerns of finding ways to improve on liquidity and organising the company to deal with an ever expanding asset base, Boess has been mainly tied up with regulations—and that principally means the Markets in Financial Instruments Directive II (MiFID II).
“I would love to tell people that I am primarily focusing on capital markets and solving liquidity issues but I am spending much more time on regulatory issues these days.”
Boess joined AGI in 1994 and was promoted to derivatives trading head in 2007. Having previously run the derivatives trading group meant the role was not completely new, he says, and indeed the transition was a smooth one. AGI was set up as a well run trading shop by his predecessor, Christoph Mast, so there was no need to change anything except to update reporting lines. Boess found that he needed to revamp the old equity-centric lines where regional trading heads were reporting to regional equity chief investment officers (CIOs). He rejigged this so that regional trading heads now report into him. It was a small but important change.
“Our trading desk has grown from being equity-centric in the early 2000s to truly all asset classes now,” he says. “Covering all major asset classes requires different skill sets and know-how since each market has its own specific micro structure, legal framework and liquidity patterns.”
Boess himself reports to the global equity CIO and global head of fixed income who in turn report to AGI’s chief executive and global CIO, Andreas Utermann. He currently manages a team of 43 traders in five countries covering all major assets. AGI has looked to balance its trading team between asset specialists and generalists. His preference is for the former, but not to the extent that the business becomes too niche.
“I want specialists in each asset class but at the same time consider cross-asset class fertilisation very important,” he says. “To achieve this, trading in Frankfurt is located in one room where 20 traders cover equities, bonds, currencies and derivatives trading. They can shout across the floor when needed. It works well.”
Elephant in the room
For its European business, AGI has split traders with specific roles—nine on fixed income and eight trading equities. Things are different in Asia and the US where traders are required to handle more than one asset. He says employing more generalists is not the best option if a company wants to deliver top quality trading services and market insights to portfolio managers, most of whom are experts in one asset class.
With €498 billion in assets, AGI is a big, sprawling shop. The company considers itself truly global and as such does not have a headquarters with its offices split between major offices in London, Paris, Frankfurt, Munich, New York, San Francisco, San Diego, Hong Kong and Tokyo.
While day-to-day communication is done via phone, email and chat, Boess has emphasised the need for face-to-face interaction. Indeed AGI has a large travel budget, he quips, with traders frequently on the road to meet their counterparts in different countries.
So what is the main challenge right now? Without any hesitation, Boess replies MiFID II.
“MiFID II is the elephant in the room,” he says. “It is reshaping the European market microstructure for all assets. The US and Asia are comparatively stable now from a regulatory point of view. But this is very much not the case in Europe where we are faced with huge amounts of regulatory change and uncertainty.”
The new pan-European regulation has been taking up most of his time—time which could have been spent dealing with issues of liquidity and trading. Clarity—or rather a lack of it—seems to be the dominant theme here. Getting to grips with the abstruse workings of MiFID II has been made more difficult by the lack of clear instruction received from the European regulator, European Securities and Markets Authority (ESMA). Boess starts to list some of the challenges occupying him from MiFID II warning “this could be a long conversation.” Certainly the vagaries of MiFID II are impacting the business across all asset classes. In equities, for example, one of the main themes right now is the systematic internaliser (SI) regime and how it will interact with existing market structures.
“It is unclear how liquidity will move between marketplaces,” he says. “Where will liquidity go in 2018? Will SIs be allowed to interact with each other? What will the role of electronic liquidity providers be? The growth in block trading is already visible, will this continue to gain market share? It is an enormous challenge.”
Illiquidity and volatility
Fixed income is even more complex than equities, says Boess. Liquidity provision is likely to be more opaque come next year when the rules finally go live.
“Writing different transparency rules for liquid and illiquid bonds does not make much sense in my view, actually the whole idea seems a little artificial. While there are liquid and less liquid market segments in fixed income different regulatory treatment and multiple execution venues will not make trading more efficient.”
And then there is best execution. A good idea in theory, the specifics of this remain obfuscated.
“How do you define and prove best execution?” he says. “The fact that ESMA was not overly prescriptive in that area was a very good decision, but the buy-side now has to fill the broad term in practice. We are comfortable that we do have very good tools and processes around that requirement, ranging from comprehensive TCA to best execution committees in each region, but that’s no guarantee regulators consider that sufficient too.”
It is a serious concern even for a shop as big and well-resourced as AGI. The asset manager has already devoted considerable resources to the challenge—there are over a hundred people working on it in the business as a whole. And things will probably be even tougher for smaller shops with less resources, admits Boess. He says that he does not know what the first couple of weeks of trading post-rules will look like.
“The whole marketplace is uncomfortable with the situation. There are too many uncertain scenarios. There are real risks that you will see illiquidity and volatile trading because of technical glitches. Or people are not trading because they don’t know how to interpret certain rules.”
Regulatory complexity aside, Boess also has his mind on other technical challenges in the market. One of these is the liquidity issue. European fixed income liquidity has been distorted by central bank purchases in recent years which, Boess says, has led to the price discovery process of fixed income markets currently “being put on hold.”
“The ECBs purchases are obviously impacting prices,” says Boess. “There is currently no classic price discovery process because there is a buyer in the market which has a very different price sensitivity than regular investors who seek optimal risk adjusted returns. Central banks are now contemplating a way out of these extraordinary measures, which will not be easy considering the volume of their balance sheets.”
It will be a challenge for central banks to move the market back to pre-2008 conditions and Boess says this will undoubtedly raise volatility when it occurs. To prepare for this the asset manager constantly monitors its investments in easy-to-liquidate assets in case of redemptions or volatility events in markets and has also established access to additional pockets of liquidity.
“For traders the day-to-day business is to make sure you know where liquidity can be found,” says Boess.
Getting a handle on liquidity in different markets requires a global approach. The business runs on one global trading platform—Bloomberg—which is vital to enable orders to move from one desk to another. AGI has also been hiring more technology specialists to go with the experience already on desk.
“Most recently I hired a guy in his 20s with a technology background,” says Boess. “We have a lot of experienced traders so we are trying to balance it out by strengthening the technology skillset.”
Technology is important to know what is possible from a best price or best execution perspective. Boess says the company has teams looking at new technologies like blockchain, big data and artificial intelligence (AI). However he is not fixed to the idea that technology will solve the market’s future problems.
“AI is a big term,” he says. “It is different in portfolio management where new AI techniques are helping with investment decisions, potentially opening up new, untapped ways of making sense of data and information. But this is less so in trading. We are not in nuclear physics and markets are ultimately driven by humans.”
He is adamant that asset managers will never replace traders with machines—though traders will increasingly have to work with machines. It is the strong experience of the relationship of different assets and markets he learnt in his job as derivatives head—“derivatives people have no home,” he says—which is helping him in the current role. While the demands of regulation remain high, Boess seems in a good position to guide AGI through the choppy waters ahead.