Union Investment is in many regards a pioneer. At the forefront of several recent market initiatives, the firm has acted as a benchmark for the European institutional buy-side on sentiment around cryptocurrencies, multi-asset trading, regulation, sustainable trading and now a hybrid organisational structure focused on what the ship’s captain, Christoph Hock, refers to as best-in-class-execution.
Since Hock joined Union in 2014, the European asset manager has undergone a continued evolution, becoming one unified multi-asset trading desk the year after he took the wheel in a bid to execute a bigger percentage of orders sent by portfolio managers. However, his work didn’t stop there. In June last year, Union was reborn with a new hybrid organisational structure that divided this central trading desk into three teams, with his traders filtered by crystalised and clear-cut methods of execution.
The three teams now sit directly below one head of multi-asset trading, Hock. Two of these are trading focused, split by execution approach depending on the market impact of an order. One is focused on high-touch trading and handles complex orders including those which might be for less liquid instruments or large orders of liquid ones that need to be worked over a few days and could create a large market impact. The other is an electronic solutions technology (EST) team which focuses on orders with minimal market impact where a trader can add little value, opting for speedy, automised and low touch forms of execution. Each unit works in tandem with the other, with the EST team often developing the infrastructure that is then used by the high-touch traders.
The structure pays homage to the unavoidable presence of automisation in the market while simultaneously stressing the continued importance of high-touch trading. For Hock, the ongoing COVID-19 pandemic and the subsequent market volatility during the last two years has re-confirmed the essential role of the trader on the desk. This importance means that despite a large portion of his team now being dedicated to electronic trading, he always ensures that the desk has enough headcount to ensure continuity of service should automisation become redundant.
“Intraday volatility is one key denominator for the level of automisation in the market. In volatile markets there is much more involvement from high touch traders. Take fixed income for instance, in March and April last year, we completely switched off our automisation engine because we realised we couldn’t get results as good as when trading these transactions in the traditional high touch and non-automised way,” he says. “It is not about saving head count; it’s about achieving best-in-class execution in the highly liquid stuff that’s partly in an automised way. You have to ensure that you have enough resources in place to deliver your best-in-class approach in these times of volatility. Automisation is not about making less, but smart use of human traders.”
Hock firmly believes that best-in-class execution does not stop with the trader and places equal importance on efficient back-office and middle-office functions. For this reason, Union’s new structure includes a third non-trading front-office unit. This back-middle-front office team deals with the nitty gritty regulation, settlement and compliance cogs that keep the wheels of the machine turning. Named the trading and regulatory services team, it’s responsible for everything from collating and publishing data for best execution RTS 28 reporting – annual top five venue broker reporting – to escalating settlement issues. However, it’s unique from Union’s competitors as despite its non-trading function it enjoys front-office status, which Hock says is key to speedily escalating settlement queries.
“When it comes to escalation, it makes such a difference whether a trading team escalates something with the broker or whether it’s a back-office team. We realise it so often that when queries come from a back-office team, quite often they are ignored. Typically, the back-office team will just have contact with the broker’s back-office team,” adds Hock.
“When executing highly sensitive transactions or transactions in difficult to trade markets like Brazil or in Korea where if you don’t settle in time, there is a punishing penalty regime in place, it’s also important that as a last step in the waterfall a senior guy or even myself escalate these types of transactions with senior management of the broker firms. When you do not have a proper settlement and clearing team, you run the risk of burning through hundreds of thousands of dollars in a worst case scenario when you have transactions which failed to settle.”
While this team sits next to the trading teams in the front-office layer and this is useful for the weight it holds in communication, it does not trade, and this Hock says, means its priorities remain separate, which prevents conflicts of interest.
“A trader typically is not highly motivated to sort out any settlement queries because it’s not really part of her or his job description. That’s also – when looking at the setup of having specialists in place for the individual roles – why it was important for us to have this middle-office, or trading- and regulatory services as we call it, team in place which is directly connected to the trading team,” he says. “It’s important that you have a unit which by definition is not allowed to trade because when dealing with compliance there could be a potential conflict of interest.”
Multi-asset above all else
No team at Union focuses on one asset class specifically, instead playing host to a handful of individuals who each have a specialism in one. “It’s important to maintain the high level of specialist knowledge we have built over the last couple of years, so we have not thrown away our USPs we have created in equities, fixed income, derivatives, and in FX,” says Hock.
Union went fully multi-asset in 2015 combining its equities and derivatives team with its fixed income and FX desk following the arrival of Hock as its head of trading in the year prior. Hock, who joined Union having previously worked on the sell-side in sales trading, set up a hedge fund and led derivatives proprietary trading at JP Morgan, was multi-asset by nature even then.
He explains that while the asset classes are inherently different, they have similarities across regulation, liquidity and technology which mean there are efficiencies that can be achieved by combining them all under one desk. Similarities, for example, between how to manage illiquid paper in fixed income such as emerging markets bonds or high yield and small to mid-caps in the equities space, highlights Hock. Meanwhile, liquidity shifting events such as news stories also have a cross-asset impact, meaning a combined desk is better equipped to manage them and traders can utilise these synergies and learn from one another to improve execution, he adds.
“For us it’s important to engage with regulators and so it doesn’t really make sense to look individually at certain themes for each asset class. It takes you a good time to build this network and so we want one person responsible for cash, equities, fixed income, and FX. When you have a big news story out in the market effecting an equity price you will also most likely see significant effects in the corporate bond and single name credit default swaps (CDS) market of that specific issuer, and there will probably be an impact in equity derivatives in the options of this corporate. This could also potentially have implications on levels in securities lending,” says Hock.
“Take a protocol like portfolio trading. That was just one way of trading equities five-to-10 years ago and now it’s widely accepted in fixed income. Take RFQ mechanisms, which originally were designed for trading against risk capital in fixed income and in FX, which are now used in equities or algos that were originally for equities and are now used in FX. That’s something you are missing when you do not holistically look at trading and assure that the individual asset class-based traders are talking to each other.”
Union’s philosophy, however, is not to provide a one-size-fits-all blanket execution system for all asset classes. While a highly complex cross-asset system would be difficult to use in a speedy manner, says Hock, a generic easy-to-use blanket system would not effectively deliver on a high enough percentage of orders received.
“Our clear message is that for the individual asset classes we prefer to add complexity by selecting the best-in-class system for each asset class rather than having a one-size-fits-all solution which just gets you a 70 to 80% outcome,” he says. “For trading we’ve decided to build on top of our Charles River order and execution management system where we needed, additional, specific infrastructure.”
The asset manager has one basic skeletal provider of portfolio management, trading and middle- and back-office, Charles River. This acts as a foundation for a combination of external execution management systems (EMS) and internally developed solutions to be added on top. In equities, for example, Union selected FlexTrade’s EMS as a bolt on for Charles River.
“We had very specific requirements and we found that FlexTrade was the one vendor which could deliver those to us. It’s important to have straight through processing (STP) in place. You can route business to FlexTrade out of Charles River and execute the transactions out of that. The fills are then routed back to Charles River and then funnelled through the process chain, back-office systems and to settlement and clearing.”
In fixed income and derivatives, it’s a different story. After finding that the market couldn’t provide a system that could fulfil its needs, the asset manager developed an in-house solution on top of Charles River, making no use of an external EMS. According to Hock, designing an EMS for derivatives is an entirely different prospect as there are fewer venues to trade with than in equities where there are multiple channels and pools of liquidity.
“When trading EuroStoxx futures or when trading bond futures you have exactly one venue where these products are traded. That’s why an EMS in derivatives is important, but it needs to be designed in a completely different way than the one in equities or in fixed income,” he says.
Despite championing separate best-in-class systems for each asset class, Union pools data across asset classes in one central data lake which can then be dipped into as and when needed. “It doesn’t make huge sense to have a data lake for each asset class. In our experience you want to have one common database with all the trade relevant information,”
A token economy
Union has proved itself ahead of the curve with regards to the growing token economy. Amid distributed ledger technology (DLT), cryptocurrencies and other digital assets, and smart contracts’ rise to fame, the asset manager became the first of its kind on the continent to get involved in a public tokenised European Investment Bank (EIB) bond transaction and currently has a selected fund where it can trade one Bitcoin exchange traded note (ETN). However, when it comes to whether Union has plans to expand that scope with more funds and delta one products, Hock holds his cards close to his chest. “Possibly,” he says with a wry smile.
“There are some add-ons to existing asset classes we could potentially keep an eye on. One is crypto and another one is non-fungible tokens (NFTs). I don’t see us trading digital pictures, but as a part of NFTs you might be able to trade also real estate somewhere in the secondary market in the future. Given the fact that we have a very strong footprint in real estate, this might become an interesting topic for us.”
At TradeTech earlier in November, Hock told an audience that Union Investment would be ready to trade native crypto by the middle of next year, confirming that he was was conducting in-depth partnership talks with custody banks on the potential launch of a crypto custody solution. He also confirmed that Union had been exploring digital assets for the past four years. According to him, all institutions should be laying the groundwork for a token economy now to avoid missing the boat through delayed implementation later down the line when serious client demand develops.
“If you start planning at the time when there is client demand picking up you’re probably late by one-to-two years. It’s important to do the planning in a proactive way with the anticipation that the demand might come up in the coming years,” he says. “You have to start doing the prep work now and take a visionary view about the developments in the token economy. This means not only looking at what the needs are of clients today, but also from a strategic standpoint looking what their needs could be in two-to-three or even five years. You don’t want to build a parallel infrastructure to the traditional assets we have in place, but instead combine what’s possible going forward with distributed ledger technology (DLT).”
For Hock, the tokenised economy is too often oversimplified down to the trading of cryptocurrencies, which to him does not fufill the definition of currencies because of their volatility. The meme generation are the ones currently getting involved in direct cryptocurrency investments, he says. Instead, he finds that the world of DLT and smart contracts and their application in the middle- and back-office, settlement, and custody could be where the game-changing element lies for institutions.
“In certain types of products when it comes to documentation, for instance for over-the-counter (OTC) derivatives, you could make use of smart contracts,” adds Hock. “We’ve for years discussed the mandatory buy-in as a part of the CSDR regulation which has now – thankfully – been postponed after intervention from the buy- and sell-side. In the future, you could have T+0 settlement – so atomic or instant settlement – using these technologies, avoiding for, example, counterparty risk.”
The contentious mandatory buy-in regime as part of the Central Securities Depositories Regulation (CSDR) Settlement Discipline Regime is just one of the fronts where Union, led by Hock, has been vocal and reactionary on behalf of the wider market.
“In difficult-to-trade names, if broker-dealers knew they might run a potential risk of a mandatory buy-in which they can’t deliver and might cost them millions of euros, they probably wouldn’t want to make us markets and show offers anymore. The CSDR penalty regime will kick in in February next year and this will further reduce the number of fails. A potential mandatory buy-in would have minor positive effects on settlement discipline only, but massively negative effects on liquidity and market structure,” says Hock. “I spoke to regulators, central banks and treasury departments about the negative implacations making them aware of that. It’s important to have an intensive communication with regulators. At the end of the day, they decide about the framework we operate in, but it’s important also to share thoughts from an investors perspective and potential concerns on regulatory initiatives to give them the opportunity to have second thoughts about it.”
The regime sought to make it mandatory for a failing counterparty to have a buy-in initiated against it with limited time and flexibility as to when this could be completed. Institutions across the Street have canvassed the regime for years due to the damage it could pose to liquidity by discouraging counterparties from making markets. The regulation was originally due to come into play in February next year, however, lobbyists managed to get it delayed again in November with experts predicting this time it could be for several years.
Hock has been involved in most ongoing regulatory discussions to grip the market in the last year, sitting within an FX group with the European Central Bank, representing the buy-side in an ESMA secondary markets working group, and operating in senior roles at not-for-profit Plato Partnership and Neptune Networks. Capital markets regulation has evolved significantly throughout Hock’s tenure at Union, with MiFID II being implemented in 2018 and bringing with it best execution requirements among swathes of other changes. The ongoing aftermath of the UK and Europe’s Brexit fallout in 2016 has subsequently meant institutions like Union must navigate an ever more divergent regulatory landscape.
“MiFID II generally led us to a more complex world. However, the subsequent fragmentation has also been a key driver for bringing higher levels of transparency and driving exchange fees down. This complex ecosystem gives us the opportunity to decide what is the very best way for us to get each individual order done. This flexibility and variety of channels we have actually is highly supportive in terms of delivering best-in-class execution to our investors,” says Hock.
“The spirit of regulation has to point in the same direction. I think at the end of the day regulators know about the importance of an equal level playing field across the regions. Our job is to deliver best-in-class execution to our investors and that’s regardless of whether the investors are domiciled here in Germany or whether we are talking about investors we have in the UK or in Scandinavia and therefore we need a regulatory environment that takes this into account. That’s why I’m not tired of having discussions and meetings and phone conferences with various regulators and being heavily engaged to achieve this goal.”
In the area of environmental, social and governance (ESG), Union Investment is one of the institutions to lead the charge particularly in the recent market initiative aimed at involving the trading community in the ongoing green conversation.
Announced by Duncan Higgins in November, the Sustainable Trading initiative is a membership network open to the buy- and sell-side alongside FinTechs and trading venues that will act as a forum for institutions to meet and create industry best practices to be implemented in the trading markets. It’s aimed at addressing the issues specific to trading, including the sustainability of institutions’ internal operations and external supply chains including counterparties.
Union was among one of the first supporters of the initiative alongside T. Rowe Price, Liontrust Asset Management, Invesco, Federated Hermes, Jefferies, BMO, Redburn, Instinet, and Euronext. “There’s absolutely no reason why ESG should stop in the process chain at the portfolio managers desk and not involve trading at all,” Hock explains.
Union under Hock’s leadership has proved to be a thought leader in an ever-changing market landscape, projecting its own style and perspective onto ongoing trends, including the rollercoaster that is the market’s uptake in tokens and its laboured transition to a more sustainable operating model. The institution’s new horizontal, multi-asset and automisation focused structure is reflective of how the market has been moulded by increasing globalisation and consolidation.
“It’s a hybrid organisational structure. In trading, it’s not two silos that we’ve created which are completely independent and separate from each other. When trading, communication and sharing thoughts, ideas and observations is really key.”