What was the biggest challenge for State Street in shifting to remote working?
Nadine Chakar: This pandemic is different from any other market crisis because of the health and safety concerns that we have today. In 2008, the world was melting around us but at the end of the day you could pop to the pub, have a drink and get the team reset.
Today, you are in an environment where you don’t know if you are working from home or sleeping at work. I would say burnout is my biggest concern. Even when people come back to the office – how do you make them feel safe?
Before I go into the office, I take my temperature and when I’m in the office I wear an egg around my neck that buzzes if I get within six feet of someone. Isolation is another problem, despite the fact you are talking to your colleagues for 10 to 12 hours a day, there is still a level of isolation that people are feeling.
What is driving the trend towards front-to-back services?
NC: In order to chase margins in a passive world with zero interest rates, we are seeing a lot of fund managers turning to private investments. That could be in real estate, private equity, or private debt. These are not asset classes that lend themselves to easy processing. They require an incredible amount of middle- and back- office support and they are expensive.
I previously worked at a fund manager and I can tell you that when there is cost pressure, the first units that feel the brunt of it is the middle- and back- office. With Charles River, the fund manager has a dashboard in front of them and they can look at all the specifications of what was moving in their portfolios. The thought process was that a user can look at it and forget it, we take over from there. You get a clean investment book of record and could strike a clean net asset value.
Have onboarding processes for Charles River and the State Street Alpha platform been impacted by the pandemic?
NC: An advantage of COVID-19 is that it has propelled us from analogue to digital, not in a generation, but in one week. The first week or two were rough – especially as India shut down with very little notice. However, even during the height of the pandemic we were converting clients to Charles River.
We have another platform called Global Link where one of the products is called FX Connect. A lot of similar products to FX Connect had a problem managing the volume that hit the market in the March to April timeframe. We were able to act as a secondary back-up to a lot of these companies. I think State Street has shone in this way. A lot of our competitors were in exactly the same boat, but State Street’s ability to pivot during the pandemic has been exceptional.
How has the pandemic impacted automation and the digital movement?
NC: They say that necessity is the mother of all inventions. I run our foreign exchange business among others and historically this has been a function that you perform in the office. There are a lot of reasons for that including compliance and oversight. Every trader has four or five screens and in a matter of days we had to figure out a way to get these guys safely home. If you saw us at the height of the pandemic in March, we were running around handing out boxes and screens. Our IT team were on the phone trying to explain to a quant how to crawl into their basement to find their Ethernet cord.
However, if we did not do that it would have been impossible to manage the onslaught of volumes that we saw at the end of March. I think that is one of the biggest attributes of humans. We adapt and we move on. I think that mass adoption and our reliance on advanced technology to help operate in this new environment has ignited this digital movement.
Has the pandemic accelerated outsourced trading?
NC: The pandemic has put a bright spotlight on all the goodness that outsourced trading can provide an organisation. The volatility that we are seeing in the markets has encouraged a lot of firms to consider expanding into new asset classes and new countries. Everybody is sitting on cash in a zero rates environment and they are trying to figure out how to put that cash to work. Firms are looking at outsourced trading as a quick ‘go-to-market’ approach versus bulking themselves up with new people and new systems.
If you had a conversation with a CEO or COO of an asset management firm five years ago about outsourced trading, they would say no that’s our secret sauce. As time has gone by and as technology has become more advanced, it’s becoming clearer they can get better efficiencies, better distribution, and better deeper liquidity by leveraging people like State Street to help do their execution.
Where does outsourced trading leave buy-side traders?
NC: Some buy-side traders join us. Others end up managing money or moving into risk management capabilities. We are an industry that is heavily regulated and the unpredictability of the markets these days requires knowledgeable risk managers.
Traders are fairly versatile and can be redeployed in numerous functions within a buy-side firm. That is another attraction to outsourced trading. A fund manager can achieve these economies of scale and achieve better cost by redeploying these resources to generate revenue, take care of clients, or manage the risk environment.
What are the other risks that can factor in the implementation of outsourced trading?
NC: You have got compliance, operational risk, liquidity risk and regulatory risk. Take the alphabet and arrange it in four letters and it is something that we must comply with. We are all geared up to think of every possibility of things that could go wrong, and we try to address those through technology, better controls of processes, or better control of intellectual capital.
That is what this business requires because we understand that at the end of the day it is not just our clients but the clients of our clients that we have a responsibility towards. We want to make sure that we can execute and ensure the safety and soundness of their own trading operations too.