Over the past decade, asset managers have moved from selling single asset classes to outcome-orientated investment products.
This move has, in part, been dictated by a change in investor risk attitudes since the financial crisis. However, the movement towards more balanced risk exposures across asset classes has been growing in popularity since the mid 2000s.
While the buy-side has been restructuring its business units and sales teams, the sell-side has been doing something very similar.
Their move towards multi-asset, however, has been predominantly driven by regulation.
Globally, regulators are demanding that fixed income transactions become increasingly electronic and pressure is building for market participants to justify algorithmic movements in a more transparent way.
With this regulatory push showing no sign of slowing, the sell-side has adapted and is quantify services in a similar way, across asset classes.
Societe Generale’s global head of execution for Asia Pacific, Stephane Loiseau, has watched the shifting sands in recent years, having been with the bank since the turn of the millennium.
He explains: “The growth of multi-strategies has been important. Risk-premia and multi-asset type mandates have changed the game for a lot of buy-siders.
“If you have one unique trading team that trades these products, you need to have the systems on your desks and implement workflows that make it easy to manage the inflows and outflows from these funds.”
Loiseau says regulators are beginning to regulate the trading of different asset classes in a very similar way, which has further underscored the need for further integration.
He says: “The first order of business is to have a multi-asset approach and create new services in algorithmic trading that neutralise a lot of the costs; to have one platform, with all of your assets in one place.”
In response, SocGen has been bringing together the operations of all different asset classes, integrating them into multi-asset teams.
“We have brought together the equities team, OTC, listed-derivatives and the prime brokerage portion which we inherited from Newedge,” says Loiseau.
“We have also added some new elements like FX. It means that you are looking at workflow in a slightly different way. Regulators are saying to make businesses electronic because this provides transparency, an audit trail, productivity gains and best practice.”
Supply and demand
SocGen says there has been a significant uptick in demand for specialist algos for derivatives markets.
Loiseau explains: “You have lots of algorithms on the equities side, but there are not as many on the derivatives side… That is the biggest area of interest from buy-side firms.
“Listed derivatives… are a global product unlike equities which are listed only on one market in one time zone.”
Currently, derivative algos follow similar strategies to those on the equities side, with VWAP (Volume Weighted Average Price) style products dominating, but sell-side firms like SocGen are seeking to expand these as a result of demand.
Loiseau says: “Most of the time, the development is focussed on the performance and on TCA (transaction cost analysis).
“How do you apply TCA, like that of equities to products that are listed on global exchanges, trading 24 hours a day, with volume distribution that can be quite skewed?”
When asked how the firm is responding to the pressures of the increased demand, he talks about reducing the client service life cycle.
In layman’s terms, it has become an ‘arms race’ between algo providers to get these new products to market and meet customer demand.
He says: “You are competing with firms that want to be ahead of you. Some flexibility around production cycle is necessary and you need quite an open mind to switch back and forth.
“That has become very clear in the past few months where the cycle of regulatory change has been so rapid.”
In Asia, product development has not been limited to algorithms for SocGen. The regulatory overspill from other parts of the world is having a profound influence. Global businesses are increasingly expecting Asian subsidiaries to adapt to some of the requirements from European and North American regulations. SocGen is no different.
Best execution guidelines from Europe’s Markets In Financial Instruments Directive II – or Mifid II – are now creeping into Asia, with regulators in Japan now openly debating the separation of research and broker commission payments.
The issue of ‘unbundling’ is also getting increased traction because the largest players on the buy-side are adopting global standards to research acquisition.
For Loiseau’s team, this has meant looking again at business models.
He says: “There is much greater awareness on the impact it [Mifid II] can have on the Asian market. This was something that was originally seen as Euro-centric.
“Asset managers have realised that it is impacting their business, how they receive services from the sell-side and how mandates are being pitched by their European-based competitors.
“It is also seen as best practice for global firms. Some firms are applying the most stringent regulations all across the world, so it creates a disadvantage if you are not applying the same principles.”
In response to buy-side firms taking a ‘global view’, SocGen, like many of its peers, has opted to develop its research from something that is region-specific to something which would appeal across all regions.
Loiseau says: “New forms of research are needed for investors, both in response to regulatory changes but also, more importantly, in light of the market context. Investment research needs to evolve towards a global marketplace, as well as from a cross-asset perspective and from independent providers.”
In Europe, the debate – which has been raging for a considerably longer time than in Asia – had suggested that the separation of research and broker commission payments may result in the disappearance of research covering the more specialist small cap and emerging market stocks.
However, Loiseau says that in the areas, where this does happen, it is a chance for the research market to evolve and attract a much wider group of asset managers.
He says: “Some traditional research methods may suffer, but there is the opportunity for other models to emerge. There are two types of independent business models coming as a result [of the changes] – independent analysts and aggregators.”
The final area of focus for SocGen in Asia has proven to be very timely, given market fluctuations over the past year.
The January panic from Chinese markets as a result of the circuit breaker limits, triggered volatility throughout the region and the world.
For the trading team at SocGen, this underscored the importance of their focus on risk controls, which has been in progress for some time to meet regulatory demands.
Loiseau says: “We spend a lot of time working on risk control models – how we access the market, making sure we comply with regulations and looking at what our clients are doing. That risk control framework is a big part of our technology spend.“When you switch to electronic trading, you are letting go of some of the power to a machine and are effectively allowing larger volumes to go through. You need to have very clever and dynamic risk controls.”