While juggling a multi-asset dealing desk in dramatic market conditions from her home office in rural South Lanarkshire, Kirstie MacGillivray explains that nobody on her team envisaged the global pandemic would last this length of time.
MacGillivray has seen her fair share of major market events having been in market facing roles for over 20 years and head of multi-asset dealing at Aegon Asset Management, formerly under the Kames Capital brand, since 2016. None, however, quite stack up against the events of 2020.
In late February, aware of the situation in Asia as cases of coronavirus skyrocketed and began sweeping parts of Europe, conversations about the possibility of staff working from home for a day or two were underway. Upon identifying that dealing was a critical function of the business, the asset manager’s team of six dealers were armed with equipment in early March to ensure they could work from home effectively.
Then, just days before a nationwide lockdown was enforced across the UK, the entire Aegon Asset Management office in Edinburgh were sent home as a member of staff tested positive for the virus.
Like most companies that had to adapt entire processes and workflows to cater for working from home, there was a challenging teething period with a sense of unease at carrying out the usual day-to-day activities in a totally different operating environment. Now, MacGillivray says, the team at Aegon Asset Management have confidence in their new normal.
“We initially faced problems when everyone logged on in the morning at the same time and it crashed the network,” she explains. “The dealers were regarded as critical, so my team had to get in first before everyone else. But we had successfully managed to replicate our desk setups with the same number of screens and ability to access any of the trading venues, order management systems (OMS) or other internal systems.
“When we began working from home, the equity portfolio managers were reluctant to do anything. At that stage, everyone was still in the mindset that we would be working from home only for a little while. We massively overcommunicated as a team and used everything within our toolkit to make sure that we didn’t lose that communication with the portfolio managers – everything was double confirmed. Nowadays, there is complete confidence.”
The communication controls that MacGillivray says were put in place at the start of the pandemic remain in place due to instances at the height of the market volatility where trades were mistakenly authorised too early. Now, if a trade comes through as authorised on the OMS, the dealers will not execute until a portfolio manager reaffirms that the trade is good.
Coalface of the market
The multi-asset dealing desk at Aegon Asset Management executes all trades for the front-office, with the exception of the property team. It covers equity, fixed income, exchange-traded derivatives, over the counter (OTC) and foreign exchange. The dealers are solely responsible for delivery of best execution.
Following an earlier move of the equity dealers, last year, MacGillivray moved the fixed income dealers from sitting separately from the rest of the business in the middle of the office floor, to sitting in closer proximity to the portfolio managers in what she says signals an evolution of the buy-side trading role.
“My dealers act like sales traders and effectively see the portfolio managers as their clients while they act as the broker to the market,” she adds. “In that sense, moving them so that they are back-to-back made sense. Our role is no longer about sitting there and waiting for the trade to come on to just go and execute. A lot of the time the dealers are looking for the next trades. They attend morning meetings and listen to and engage with the portfolio managers to see where the interest is coming from.
“The dealers are the eyes and ears of the market and can reflect back any market interest. There is a brokerage sales trading relationship going on now, which was definitely not the case five or six years ago, and that’s across asset classes for us.”
Straight-through processing (STP) is a focus in terms of the operations of Aegon Asset Management’s execution workflows. The desk uses one OMS across all asset classes and has historically always deployed an execution management system (EMS) for equities trading.
Like many buy-side heads of trading, MacGillivray is on the hunt for a fixed income EMS but is yet to find a system that caters to the team’s needs. The dealing desk is connected to all major equity and fixed income venues such as Tradeweb, Liquidnet, ITG, BIDS Trading, MarketAxess and others, but MacGillivray stresses she will not connect to any venue without STP into the OMS.
This move, she explains, removes a lot of risk – much to the delight of the operational risk team. But the efficiency gained with STP also allows for better utilisation of the traders’ time, which is especially important given the changing role of the dealers on the desk.
“It goes back to the point earlier of the evolution of the trader,” MacGillivray says. “It’s not about shoving trades down the pipe anymore. The time saved by having that kind of efficiency with STP is better used looking at, talking to and understanding the market.
“The dealers are at the coalface of the market in getting first-hand market information and that became even more crucial in the volatility earlier this year. Previously, they were seen as useful for the odd snippet. But the importance of dealers in the entire investment process has now really come to the fore.”
As noted by other trading desks, MacGillivray says high-touch trading surged in the midst of the market volatility in March and April. With traders adjusting to remote execution, perhaps not as confident in some processes as they would usually be, broker relationships became a focal point for all asset classes.
Trading costs in some instances were three or four times higher than what the dealing desk was used to paying. As the costs of trading increased so rapidly and so extensively, good relationships with brokers were even more key in gaining the best price. But as banks and brokers also adapted to the pandemic, this became more difficult.
She adds that Aegon Asset Management’s story about adapting to working from home is very similar to other buy-side firms. On the sell-side, however, it was a different story.
Many of the bulge brackets did not invest as heavily in facilitating working from home and instead leaned towards disaster recovery sites or split teams between home and the office. With split teams and sales traders more difficult to reach, came wider spreads as it took far longer to reach counterparties grappling with the new situation.
Elsewhere, anecdotes of the larger banks and brokers pulling back from the market as volatility increased became common, and more and more buy-side traders turned to the second-tier brokers.
“In the credit markets during the volatility, it very quickly moved to a situation where unless a broker had an axe there was no point in trying to do anything with them – you just knew there was very little chance of engagement,” MacGillivray recalls. “We still do a lot of voice trading on the fixed income side, but for the period of March and April into May we spent most of our time pouring over axes to determine who we could likely trade with.
“Likewise, on the equity side, our equity dealers have very strong relationships with the sell-side, in particular the bulge brackets, but we extensively utilised the second-tier brokers who had clearly invested in having staff work from home. That was really important. I think the more confidence you have in the technology you are using, the more confident you are to trade and put-up market risk.”
As the bulk of the flow on the equity dealing desk is mainly small- to mid-cap equities, considered much more difficult to trade than blue chips or large-cap stocks, relationships are that much more important in terms of finding block liquidity.
“We are very cautious of information leakage and that’s why this is still a relationship business,” MacGillivray adds. “We can do as much as we like electronically, but ultimately you need the relationships and trust with your brokers to find liquidity, especially in the harder-to-trade names.”
With the introduction of MiFID II and more stringent best execution requirements, the buy-side has more data than ever before for in-depth analysis on trade and counterparty performance. MacGillivray’s dealing desk carries out detailed pre- and post-trade analysis on the equity and foreign exchange trading, which is then utilised to inform future execution decisions.
The increased data and comprehensive analysis allow MacGillivray and the dealers to have more effective conversations with counterparties. With this, the dealing desk has gravitated towards ten or a dozen names that provide good execution, and there are instances where counterparties have been removed because the data demonstrates a consistent underperformance.
“I think what the sell-side is offering, particularly the bulge bracket firms, is access to technology that we perhaps wouldn’t have access to. You see that with their ability to respond to regulatory change,” MacGillivray explains.
“But you do wonder whether there will be consolidation or pulling out of certain segments of markets. We have already seen that to an extent with Deutsche Bank – the sell-side will look hard at the profitability of their individual business sectors. And who knows what business decisions will be made post-Brexit when we see how the market lands.”
Reacting and adapting
In terms of European market structure and its evolution in the short-term, MacGillivray says the next 12-18 months will be interesting to watch. With Brexit, the outcome of the MiFID II review, the debate on shortening market hours, and intensified efforts in environmental, social and governance (ESG) and sustainability from a dealing perspective, there’s certainly lots for the market to focus on.
Recalling conversations with buy-side peers amid large-scale preparations for MiFID II several years ago as traders feared the regulation would effectively kill the marketplace, MacGillivray champions the market’s ability to react and adapt.
As the industry prepares for further potentially extensive changes under the MiFID II review and Brexit, it’s clear that once again the market will be required to react and adapt, despite widespread agreement that the rules may not benefit end clients.
“The European regulators remain determined to force everything onto lit markets despite asset managers and the sell-side arguing that this is not in the best interests of clients,” MacGillivray says. “There is potential toxicity in the lit market, and we don’t want to interact with that. The regulator is also looking at ‘re-bundling’ fixed income research because it didn’t narrow spreads as intended. It will be interesting to see how that develops.
“The market is ever-changing, but it’s very good at reacting to change. I think everybody initially panics as we’re forced to grapple with new rules and regulations, but the market adapts and ultimately that’s part of the function of the market – to adapt.”
Elsewhere, traders on both the buy- and sell-side have recently argued that market hours in Europe should be shortened. Results of a consultation on the proposal from the London Stock Exchange revealed far-reaching support for the move from a well-being, liquidity and market structure perspective.
As the industry agreed that for the notion to work it must be implemented across all European exchange groups, Euronext poured cold water on the bid by dismissing the plans due to little evidence of the benefits. MacGillivray, who was in favour of the move, believes that won’t be the last we hear about the plans.
“I don’t think that’s the end of the conversation, there was so much support for it,” MacGillivray explains. “I do think it would help in terms of work-life balance, but actually from a market liquidity perspective it may have been more significant.
“We have a situation now where liquidity is concentrated at the open in the first hour or so and then at the close. There’s bits and pieces that go on throughout the day, but not much. Reducing those market hours would hopefully enable that liquidity pool to actually be more evenly distributed.”
It will take some time for the fallout of such developments in market structure to be fully realised. But in the meantime, it’s clear that the role of the buy-side trader will continue to evolve as the ongoing global pandemic throws a spotlight on the critical nature of a multi-asset dealing desk.
In many ways, MacGillivray is at the forefront of the evolution of the buy-side trader. As the dealers at Aegon Asset Management progress into sales traders for their portfolio manager clients, the ongoing pandemic will continue to underscore the importance of execution to the institutional investment process.