“Failing to plan is planning to fail”: Scenarios for the post-lockdown trading desk

Dan Shepherd, CEO of BTON Financial, outlines how applying technology to the trading desk can alleviate some of the pressure as asset managers prepare for a potential second wave of coronavirus.

Dan Shepherd, CEO of BTON Financial

As the lockdown restrictions begin to ease, governments and financial institutions alike are looking at how to return staff safely back to offices after months of working from home during the coronavirus outbreak. This raises a wealth of challenges and concerns not just for staff safety and business continuity in the short-term, but also in the event of a second outbreak.

Goldman Sachs has plans in place to gradually return staff to work, for example, using Asian offices as precedents to learn from. Temperature scanners have been installed in the Hong Kong office to check employees for fever, and the firm is also considering installing them in its New York headquarters, which along with London will take longer to open due to the severity of the outbreak in these cities.

There is, of course, no guarantee that the virus is simply a one-off occurrence and it may well return. Firms need to plan for contingencies in the interim period before the introduction of an approved vaccine. This includes not only logistical requirements in aid of protecting the health of workers and providing the technology required to support remote working, but also adequate compliance in order to meet the strict regulations to do with supervisory roles. Upon return to the office, an old maxim comes to mind: “Failing to plan is planning to fail” – firms can legitimately claim they didn’t see the first outbreak coming, but this same excuse can’t be used if and when an outbreak next occurs.

The first real test

As an initial response to traders working from home due to the coronavirus pandemic, the US Financial Industry Regulatory Authority (FINRA) temporarily waived some of its supervisory rules and the UK’s FCA eased its position on recording calls from home. In normal circumstances, the FCA demands UK financial institutions to keep records of all trades and transactions related to certain types of business for at least six months to help regulators monitor for market abuse, such as insider trading. Even though the FCA relaxed its rules, companies are nevertheless expected to “consider what steps they could take to mitigate outstanding risks if they are unable to comply with their obligations to record voice recordings.” If financial services companies are unable to record calls they are then expected to “come up with a plan to fix the problem”. 

Indeed, in a Market Watch newsletter issued in May, the FCA further warned that it expects market participants to comply with obligations under the Market Abuse Regulation (MAR) irrespective of operational challenges created by the coronavirus, stating: “Market participants should continue to assess whether the procedures, systems, and controls they have put in place to comply with their obligations under MAR for identifying and handling information remain adequate to mitigate any new risks. This includes the impact of new working arrangements.

It is also interesting to note that the UK regulator sees the Covid-19 lockdown as “the first real test” of the UK’s Senior Managers’ Regime (these are the rules that hold senior managers more accountable for malpractice). Industry participants have been reported as saying that it is simply not good enough for senior managers to go to compliance and ask how to supervise their people working remotely since it is legally their liabilities and responsibility.

Failing to plan is planning to fail

Asset managers need to start planning now in the event of a second outbreak predicted later this year, whereby traders may have to return to working from home. The financial services industry is fortunate, however, in that there is a raft of advanced technology tools out there which solve many of the problems the pandemic has posed, namely, “how to manage on both an operational and compliance level when most of your workforce is working from home?”

One example of such cutting-edge technology is that of an outsourced dealing desk which helps buy-side firms radically revamp its trading infrastructure. Unique because of its highly automated approach, an outsourced desk can transform the front office by driving greater performance and quality of execution through the use of independent technology and data-driven techniques.

In the event of a second lockdown, the application of technology to the role of the trading desk can help in the following areas: 

Automating processes: By automating the processes of a dealing desk, all capabilities can be seamlessly recreated from home by removing operational complexities of managing multiple vendor/partner relationships and the underlying trading and connectivity infrastructure. The trading desk then manages relationships with numerous brokers, and portfolio managers who have to make investment decisions analyse each incoming order and decide the best path of execution. Automation also gives users a transparent audit trail for regulatory compliance.
Reducing costs: The use an automated function lessens the need for as many people to work from the office, and reduces the overhead costs related to hiring an excess of traders. 
Focus on core competencies: More than ever, asset managers will need to focus on generating alpha for their end clients. In this scenario it will be key to improve trading efficiency by taking advantage of emerging liquidity and execution opportunities through technology such as broker routers to select the broker and execution algo.
Embracing the future of electronic trading: With the focus of the financial services industry on data and technology, the firms that are doing well are those that have made their trading processes more efficient, meaning they can be more profitable over periods of extreme volatility.

Plans revisited

Asset managers are going to have to revisit their business continuity plans in light of what we have learned from the coronavirus, including an in-depth analysis of operational and compliance processes to help them better manage the new way of working. Traders should look to tools that can not only future-proof a trading set-up, but also improve trading performance by automatically selecting the most appropriate broker with the most appropriate execution algorithm, while at the same time ensuring full regulatory compliance.