Integrating trading of new asset classes in a straight through processing (STP) model is no mean feat. As buy-side trading desks continue to migrate towards multi-asset operations, harmonising workflows and ensuring talent across instruments being traded are at the same high standards can be a real challenge.
For Geneva-based specialist asset manager Unigestion, with $19.7 billion in assets under management, the formation of the cross-asset solutions team several years ago meant that Eric Champenois, head of the multi-asset trading desk, and Stéphane Marie-Françoise, senior vice president for equities trading, were about to tackle that challenge head-on.
“As of today, we trade everything. The bulk of what we trade is definitely equities, but we also trade a lot of futures and options, rates, bonds, credit derivatives and FX,” Champenois tells The TRADE. “We are quite active in most asset classes now. When we moved to an STP model, it was absolutely vital the operational workflows across those additional asset classes were as good as what we had already established. For us, the challenge was replicating the stability we had achieved in equities.”
Handling new investment strategies with new asset classes meant handling and implementing new systems. Following a widespread review of its IT infrastructure and an in-depth due diligence exercise, Unigestion selected a global front-to-back portfolio and order management system (OMS), and several dedicated execution management systems (EMS).
The asset manager has a large proportion of clients based in Europe and the team decided the business would be best placed adhering to Europe’s principal, and arguably most burdensome regulatory regime, MiFID II. With this in mind, the trading desk was split. Champenois and Marie-Françoise are trading out of Geneva, while ex-BlackRock trader Frank Galouzidis and former British Steel Pension Scheme trader Edward Gladwyn operate from London.
“It made sense from a business perspective for us to have front-office activities in London,” Champenois explains. “We had gained more clients in the UK and although it was challenging, we knew in that sense we had to be global. We can say today the platform is truly global, it’s a multi-asset platform and all of our traders are using the same systems.”
He says the team were handed complete control by the most senior managers at Unigestion when reviewing and choosing which vendors to work with as the trading desk shifted to multi-asset and the business became MiFID II compliant. This, Champenois says, made the process and decision-making far smoother, as they were essentially handed a blank cheque to choose the very best option for the trading desk.
“The regulation is of course a very important point,” Marie-Françoise, recognised Rising Star under The TRADE’s Rising Stars of Trading Execution initiative, and two-time nominee at The TRADE’s Leaders in Trading buy-side awards, adds. “There was a lot of additional administrative work and adjustments that needed to be made to the trading platform. We are now closely tied to MiFID II in terms of systems and processes, despite it being very new to Switzerland and our desk being a bit of an exception in Switzerland.”
In-depth discussions with peers and brokers were perhaps the most important tool for the traders when implementing such vast changes, and in becoming a MiFID II-compliant asset manager. Brokers also provided additional and regular training sessions to help the traders in Geneva and London, most of whom had a strong background in equities trading, gain the required expertise to trade the new instruments.
“It was an obstacle to overcome in terms of gaining the expertise for trading these new asset classes and to work with the most appropriate counterparts,” Champenois explains. “We are still learning every day, and the real benefit I would say comes from the proximity we have with the portfolio managers. We are interacting with them constantly and discussing strategies or pricings on a daily basis. Our brokers were also key partners in training and providing us with advice.”
Extreme market conditions
The new multi-asset set-up, which had taken Champenois and his team several years to fine-tune, would prove useful come March this year. News of the global spread of coronavirus hit markets hard at the end of the first quarter in 2020, with volatility reaching levels unseen for a decade. As spreads widened, market depth plummeted and some brokers pulled back from the market entirely, trading floors across the world closed and the industry was forced into a remote working environment.
Unigestion was not immune to the developments, and as a global asset manager with a footprint in Europe, North America and Asia, the business acted fast to ensure the safety of its staff. All employees were asked to work remotely at the peak of the pandemic, except for a few sensitive departments where weekly rotations and safety precautions were put in place to guarantee continuity of services to clients. This applied to trading, risk, IT, and logistics.
“Given the fact that we have been extremely active in terms of flows, everything has been pretty smooth technically speaking,” Marie-Françoise says. “Of course, markets have been extremely active, but coverage has been super steady and there was no disruption to trading.”
Communication, as most workers in any industry would likely agree, was impacted both internally and externally. Ensuring instructions were efficient and clear for everyone from the traders, brokers, portfolio managers through to operations has been a focus for the entire community.
Champenois outlines how at the height of the market volatility, it became more and more difficult in terms of communication with brokers. Traders were quick to turn to electronic channels to gain access to the market and ultimately get business done as high-touch desks became less reactive under the strain.
“Brokers were busy and there was sometimes a lack of reactiveness, especially in the derivatives space,” Champenois adds. “If you were relying on a high-touch desk, then you risked losing a lot of time and not getting anything done. The quickest way to trade in those severe market conditions was through electronic platforms, which were robust and suffered no disruptions.”
In options, Champenois and Marie-Françoise agree the volatility was particularly extreme. With large options trades, the desk often opts for request for quote (RFQ) with its counterparts, but they explain the quotes and prices were so wide that in most cases they didn’t want to trade. In the end, it was easier and more effective to go on-screen with direct market access (DMA) and avoid losing precious time amid wild price swings across the market.
“I think the sell-side did the best they could under the circumstances,” Marie-Françoise says. “It was clear that some of their taskforce was at home, others were in the office, but everyone was all over the place. We are a bit more centralised, so maybe the way in which brokers are set-up made the process less effective. It is an unprecedented situation and we have all had to adjust to the new landscape. Fortunately, the DMA and electronic channels were our safety net.”
For algorithmic benchmark-style usage, Champenois and Marie-Françoise witnessed market participants increase their adoption of percentage of volume (POV) and implementation shortfall (IS) amid the volatility to minimise risk and opportunity cost.
Unigestion’s trading desk also adapted its processes and strategies to combat the high intraday volatility and handle large rotations, depending on the nature of the flow. When using an IS benchmark, Champenois explains the open slippage sometimes multiplied two or three times in less than an hour making it even more difficult to trade.
Both traders had agreed with investment lines to be more passive for multi-days USD neutral rotations and sliced orders gently during the day rather than act aggressively. In these cases, they switched from IS benchmark to volume weighted average price (VWAP) benchmark, knowing that from a transaction cost analysis (TCA) perspective, it is their main valuation metric. While this meant risk increased slightly, in the end everyone agreed it was better to get the trade done.
“The thing with these rotations is that you may have two or three days of volume to trade on some stocks and the opportunity cost and open slippage we were moving so much in such a short amount of time that to us, it didn’t make sense for us to trade quickly,” Champenois explains.
“That’s why communication between traders and the portfolio managers has to be extremely smooth because we have to make these decisions quickly. It is so important to communicate efficiently – not sitting next to each other was very difficult.”
When it came to single stock orders however, the traders shifted towards more aggressive DMA and liquidity seeking strategies, a trend which they agree other market participants had also adopted to ensure the trade was done in a quicker time frame. Interaction with periodic auctions and dark liquidity seeking strategies were also more widely used.
“Looking at the volume curve, we noticed the way liquidity was forming during the day had shifted compared to other market events,” Marie-Françoise explains. “Although the close was still a huge part of the day, we noticed it was slightly lower than it used to be. Traders were avoiding the open too, and executing in a more closely fitted time frame through venues like periodic auctions more than usual.
“Liquidity on-screen was also larger than usual, in some cases two or three times larger – but with a trade-off. Do you want to sacrifice however many basis points to get the trade done, or do you want to try your chance somewhere else? I’d say the fragmentation we had before has tilted towards dark and auction venues. We certainly used those venues more. When analysing the TCA regarding our algo strategies, it showed we were very much involved in the periodic auction more so than usual. It was very efficient to be fair.”
Champenois and Marie-Françoise place extreme value on their partnerships with vendors and system providers, similar to the value they place on their relationships with brokers. They are in constant communication with their EMS providers, seeking custom development and training to get the very best out of the platforms the trading desk is using. In return, the trading desk plays a role in testing new systems or upgraded versions for their vendors, and providing valuable knowledge of trading that the firms may not have.
Relationships, whether that be with vendors or brokers, have evolved in recent years for the trading desk at Unigestion. Upon becoming MiFID II compliant, and as the fallout from the separation of payments for research and trading under unbundling played out, Champenois and Marie-Françoise noted a shift in some of the broker partners.
“When MiFID II introduced unbundling, we saw the level of service with some of our brokers decrease quite significantly,” Marie-Françoise explains. “We didn’t want that and opened up discussions with some of these brokers. We reached a point where our broker list was reduced, but I would say our relationships with our brokers now are stronger than ever. Several years ago, we were just a number to some of our brokers, but that has shifted and we have become solid partners. We offer them good commitment because we give them a good amount of business, and in return we expect a good level of service.”
Like asset managers in Europe, Champenois and Marie-Françoise are keeping a close eye on the ongoing review of MiFID II. They agree, as many other market participants would, that a consolidated tape for trades and quotes should be prioritised to improve transparency, strengthen best execution, and boost competitiveness.
Both note the regulator’s lack of commitment in laying out plans for the tape, and point to the recent consultation on the MiFID II review which also seemingly lacked commitment in terms of which direction the regime will be heading in the future.
“We would have liked to see things move faster,” Champenois says. “These topics around the consolidated tape and MiFID II have been circulating since MiFID was introduced and they have still not been applied. We may see a new version of MiFID II soon, but as of today, it is unfortunate that it has taken so much time to have something concrete in place.”
On the potential changes to dark trading and the double volume caps (DVCs), Champenois adds the adjustments put forward by the European Securities and Markets Authority recently could be problematic from a technological point of view. Brokers and the buy-side have developed tools to monitor and take into consideration the data to trade.
Imposing changes to systems to accommodate adaptations to the DVCs after three years would prove burdensome for many market participants, he says. Dark venues would also likely see an uptick in market share, at the expense of lit markets. For Marie-Françoise, the increased fragmentation and complexity born out of the MiFID II regime is further highlighted by the simplicity of trading Swiss markets nowadays.
“In terms of MiFID II, the addressable liquidity is very difficult to evaluate and the more venues you have the more difficult it becomes. If you don’t know the right venue to go to then you simply don’t have the liquidity,” Marie-Françoise says. “Even for the brokers, constantly having to adjust their algorithms and strategies, it’s very complicated. Systematic internalisers have not really played their role either, and the size they offer is very low for us.
“On the opposite side, in the Swiss market, there is very little fragmentation since the EU decided not to renew equivalence. With just one dark venue, we find it much easier than before to trade – even in illiquid names. The liquidity on-screen is just magnificent. Of course, there is spread. But if you remain passive or stay mid-spread on the bid/offer, you will always get your business done. I would argue we may not need this complexity and Europe should be far less complex than it is now.”
Champenois and Marie-Françoise concur that automation and technological improvements implemented recently, and as they became a MiFID II-compliant multi-asset operation, has also ensured their processes are as efficient as they can be.
Market structure issues remain, whether that be the ongoing MiFID II review, the share trading obligation or lack of intraday liquidity. But both traders continue to prioritise relationships with brokers and vendors and expanding their expertise across asset classes, but most importantly, continuing to deliver for end clients.
“The main point for us at Unigestion is that we are continually looking to manage risk – this is part of our DNA,” Champenois concludes. “It is our main priority and the trading has to operate smoothly with a controlled operational risk across all asset classes – and we already have this in place. Sure, we have room for automation in some areas, but we are different from other asset managers. For us, a full automation could in fact add additional risk.
“With recent developments, all market participants are in the same position. Liquidity has been good in terms of flows traded, but stress and volatility have spiked and transaction costs have increased heavily since the beginning of the year. But on that, we have been able to deliver good results overall for our clients. I don’t see why we can’t continue to do that and improve further on that throughout the rest of the year.”