DWS Group’s Werner Eppacher: ‘Liquidity is like a shy deer’

Global head of trading at DWS Group, Werner Eppacher, sits down with Annabel Smith to talk talent retainment on the trading desk, how to better use data to improve TCA earlier in the trading process and whether the new market environment could go some way to increasing diversification.

Werner Eppacher has spent the entirety of his two-decade financial career with German asset manager DWS Group, catching his first glimpse of a trading floor as an intern for Deutsche Bank in 2003.

“A trading floor looked different back then – more noise and shouting – so it was a lot of energy and that motivated me to join,” he says.

He joined DWS Group a year later as a portfolio manager and worked his way up through the ranks, going on to lead teams of PMs focused on a range of instruments that stretched across asset classes.

But Eppacher began to notice a distance between himself and the day-to-day action of what was happening in the markets. He missed the energy that first drew him to trading and so, when the chance came to move closer to the execution side of things, he took it.

Eppacher moved to New York in 2017 to take up the role of head of multi-asset for the Americas, before moving back to Germany to head up the firm’s global equities business and later took the helm all together as global head of trading in 2021. He now oversees the asset manager’s trading business which is split into three pillars: the trading desk covering execution, securities lending, and trading solutions covering centralised portfolio management functions including hedging and overnight deposits.

“I was happy to be able to bridge that gap and go back to a more trading focused part of the job and get closer to the markets,” explains Eppacher.

Eppacher’s experience is truly multi-asset, having spent several years as a portfolio manager and trader across asset classes serving DWS’ whopping €841 billion in assets under management. As of March, roughly a quarter of that AUM is accounted for by active fixed income instruments and another quarter for its passive business. This is followed by 13% being accounted for by alternatives and 12% by active equity.

There are no prescribed measures for any particular asset class at any given time. Instead, the trading team reacts to market events tailoring their approach across asset classes to whatever activity is taking place and opting for an all-hands-on-deck approach when major moves occur.

“It [DWS Group’s asset class split] depends on the market environment,” he says. “With the Russian invasion there was a lot of attention to the OTC derivative side of our business. Then you had the recent banking crisis where exposure becomes a topic in the securities lending space so that part of the business comes more into focus. You had the gilt crisis. It’s attention where it needs to be and then we have these all-hands-on-deck situations.”

A people business

While the action and excitement of the trading desk is what drew Eppacher to the markets, his primary focus – like many other individuals in his position – has since moved to his people.

“I’m not involved in day-to-day trading anymore,” he says. “I’m sitting amongst my traders and so if there are larger situations that require attention or large ticket sizes, I want to know the strategy.”

Talent acquisition and maintenance has become central to the day-to-day operations of many trading heads as financial services seeks to compete with other industries amid the new hybrid working model.

“Traders need to sit in front of a screen. There’s no way around it. I can’t just leave for a coffee or a walk. There are certain times of the day when there needs to be desk coverage. There’s no discussion point around it. For young talent, maybe that goes against their impression of a perfect job. Trading is to a certain degree less flexible however for buy-side traders at least there is room for a hybrid working model,” says Eppacher.

“Frankfurt is spoken about as a trading hub but it’s not the largest talent pool for traders in Europe, so a lot of effort goes into building up juniors because the free-floating talent is very limited. If you want top talent you need to invest to keep them on the platform. Finding traders is the easier part. Giving them a working environment where they feel that they have impact is not that easy in a large firm where innovation is at a different pace than a start-up.”

Ensuring teams are properly staffed with the right kind of people is particularly relevant to a firm like DWS which operates using a global trading standard across its regional presences. The trading business across its three pillars includes 60 members of staff globally. The execution business is organised into three regions across EMEA, APAC and the US, each with a regional head that reports into Eppacher.

Within this regional structure, the firm has traditional asset class structures including a fixed income macro desk, credit desk and equity desk. In the US, DWS Group has a structured finance desk, and in APAC there’s a smaller team of four that covers the multi-asset desk because the book of business is slightly smaller.

“We have global trading standards because we are operating under so many restrictions,” Eppacher explains. “I need to trust that my regional heads are on top of regional specific things.”

Perhaps one of the most drastic changes the markets have seen during the length of Eppacher’s career is the rapid adoption of technology and how this has evolved the skill set required to be a trader and subsequently the type of person operating within this industry.

“The intrinsic motivation or the basic skills of a trader hasn’t changed. You need to have a natural drive to find the best deal where the biggest bang for your buck is,” says Eppacher. “That’s something that needs to be in your DNA to a certain degree but clearly from a practical skill set these days you need to come with a tech savvy-ness that wasn’t necessary one or two decades ago.”

However, if the last few years have taught the industry and those running the trading desks anything, it’s that experience of volatility and bear markets can be just as valuable as a good understanding of how to code.

“It’s so valuable to have people that know how to stay calm in critical situations and have seen things and have a certain resilience to stressful situations. I think that’s a very important skill set that you cannot learn. You have to live through it,” explains Eppacher.

“By automating workflows, it frees up capacities for the traders to focus on large trade situations but on the other hand if this automation breaks down suddenly the trader still needs to handle all sorts of tickets. What gives me comfort is having people sitting on the desk in every asset class that still know how to execute a trade by voice.”

Technology on a global scale

For Eppacher, technology development is essential to keeping up with sell-side institutions as they automate more of their flow.

“Smart order routers are becoming smarter and smarter, and we now have auto pricing in the bond world. You’re not facing human beings anymore for smaller size tickets,” explains Eppacher.

In terms of order management, DWS uses one system across the entirety of its business, allowing the whole of the firm’s value chain to speak the same language, which Eppacher says helps when it comes to the automation of workflows. However, with DWS being the size that it is, it makes customisation and flexibility more challenging.

“The beauty of it is it is the same system from front-to-back,” says Eppacher. “You have no interfaces that might trouble you or create bottlenecks. However, you have to accept that certain special features or fancy stuff is maybe not as quickly or easily available as maybe in a specialised system or specialised application. We customise as much as we can. In trading you need to make sure that you don’t overstretch customisation because you want to make sure that certain standards are met.”

“In a large company, the whole value chain is very large and you need be aware that if you change things on one end there can be unintended consequences downstream.”

Budget is at the forefront of Eppacher’s mind – like many buy-side heads of desks – especially when it comes to technology. Larger and more traditional asset managers typically need to be more innovative with how they fund technology development to keep up with their smaller systematic competitors who have technology at the core of their strategy. For DWS, this innovation comes in the form of collaborating with vendors in a mutually beneficial partnership.

“I would love to have endless budgets. The fact that we are the size of manager that we are means we have a certain amount of leverage to our vendors. It’s very helpful because it’s a collaborative way of moving things forward with venues, transaction cost analysis (TCA) and order management system (OMS) providers. We share the burden of finding budgets and funding things going forward.”

For Eppacher, the next level of automation lies in taking better advantage of data before a trade takes place to set trading parameters based on the market environment and the current liquidity situation.

“These parameters that define automation need to be flexible and variable and adjust to the market environment using historical trade data. We need to make better use of data we produce at the desk. Depending on the trajectory of our trading and depending on historical execution data that we generate on the desk, the parameters should adjust automatically to the environment,” he explains.

“What you want to have going forward is a system where the size of an order – whether it has been automated or not – is calibrated based on the liquidity situation, volatility environment and the specifics of the instrument.”

A shy deer

The name of the game across the buy-side is accessing liquidity to generate alpha and optimising strategies and operations to enhance this. DWS Group is no exception to this rule.

“Liquidity is like a shy deer,” says Eppacher. “You know it’s there but if you need it most it’s gone. Traders need to have a high awareness on how to approach the market especially in large ticket situations.”

Finding the best liquidity for an order remains a top priority for Eppacher and his global trading desks but another key source of alpha that has become increasingly front and centre for DWS and most firms on the buy-side is the reduction of transaction costs. Eppacher believes this process can be improved by offering access to cost reduction methods earlier in the trading process before a portfolio manager sends an order.

“In a future more modern setup, if you are able to make use of the data that you are producing at your desk – be it historical data or real time data – and enrich that with market colour and axes from brokers dealers and deliver this information to your PM in a systematic way, you can do a lot in order to minimise transaction costs,” he says.

“A PM then knows how liquid an instrument is and how much it would cost for him to execute before they come up with an investment idea. It might go as far that they put in an ISIN and it shows that maybe to achieve the same exposure from a risk, credit or duration perspective there are five alternative instruments that come with a similar risk framework but are much more liquid. This all needs to happen before the point of trading.”

“To bridge that gap is a large challenge for trading desks but it’s something that we are putting a lot of emphasis behind.”

Consolidation or diversification?

Minimising costs has become more essential than ever in today’s market environment where an extended period of low volatility and high rates environment has seen a wave of consolidation and M&A announcements on the buy- and sell-side in the last few months that shows no signs of abating as firms huddle together for warmth.

“Very long periods of low volatility are not good for the quality of the diversity of players. There’s a lot of consolidation happening in the market which reduces the diversity of the investor landscape,” says Eppacher.

“I hope that the changing landscape and going back into a normalised rate environment will encourage more volatility again in the markets cross asset. That should pave the way for more diverse players so that there are more diverse investment strategies which should create more two-way interest in the market. If it’s just long only and passive people driving volumes a lot is happening in the Close. Fundamentally driven investment approaches typically tend to go into the same direction.”

At the heart of a lot of this consolidation is rising costs across the industry that firms are looking to bring under control. For Eppacher, further M&A activity on the buy-side is inevitable as, unlike in other industries, asset managers are rarely able to pass rising costs on to clients.

“Can you imagine an asset manager increasing the management fee for an ETF? Our input costs are increasing as well with energy complexity and workforce cost. We are under similar cost pressures as other industries are but it’s nearly impossible to pass on those extra costs to the customer or to the end investor of the funds. The name of the game is clearly to make sure we are as efficient as possible and use technology to increase efficiency,” he concludes.

“That’s the only way to withstand this pressure. Not everyone will be successful in that which means that there will be consolidation.”