The Multi-Asset Revolution Part II: Risk, Centralisation and Consolidation

By Vincent Burzynski, Executive Vice President, FIS’ Global Trading Business

Vincent BurzynskiAs discussed in the previous issue of GlobalTrading, the question is not if but when multi-asset trading will catch on. Indeed, the move from old style to modern multi-asset trading is well underway on the sell-side. According to a recent research report from Aite Group, The shifting sands of global trading, 62 percent of sell-side desks indicate that they have already organised some trading desks on a multi-asset basis – that is, with multiple asset classes traded either on a single desk or multiple but aligned trading desks.

The risk-enabled multi-asset trading firm
Much has been written about the downsizing of traders and the hiring of compliance and risk management staff literally in their place on the trading desk. This trend is confirmed in Aite’s research. In this survey, sell-side firms also confirm the renewed attention being paid to risk management.

This is 100 percent reflected in these firms’ current risk profiles, with more and more preferring to be flat by end of day. Matched or riskless principal trading abounds. Keeping positions is on the wane, and even putting a trade on for a week is not as welcome as it once was. Given the proportion of sell-side trading that is purely customer-driven, sell-side firms’ emphasis on customer risk management is unsurprising.

Multi-prime or centralisation?
One of the major services the sell side plans on offering the buy-side is risk management and margining and collateralisation services. To that end, 79 percent of sell-side firms think that consolidating their customers’ trading into a single sell-side platform is necessary and a good idea for the buy-side.

Offering cross-asset offset across positions will help buy-side firms optimise margins and collateral and entice them to concentrate more order flow with brokers offering this type of service. But this runs counter to the multi-broker narrative. Some buy-side customers are particularly concerned about information leakage and enjoy being on the multiple platforms that multi-prime affords them. For them, consolidation onto a single sell-side platform is not the answer.

Another interesting finding in the report is that the overwhelming majority of sell-side firms surveyed – 88 percent – say they have or plan to have a centrally managed, real-time, pre- and post-trade risk management system through which they aggregate risks. Of course, a centralised risk system with aggregated risk across assets, markets and systems is critical for a complete view of risk, especially given that order books (i.e., client portfolios) are still siloed at 70 percent of respondent firms. In Aite’s interviews, however, it was less clear how many of these systems actually provide risk management across products and asset classes to the trading desk themselves, though there is sentiment in favour of more cohesive risk views there.

Reducing complexity and TCO: Is trading system consolidation the answer to all pains?
Sell-side firms’ IT infrastructures are often made up of a mass of disparate legacy systems connected by home-grown integrations. That certainly seems to be the reality for many trading firms. Indeed, the firms surveyed confirm that they have a large number of trading and risk systems. Only the smaller or most focused firms have just one or two systems in place. In follow-up interviews, few think that is sustainable.

Will that be followed up by action? Seventy-nine percent of firms indicate interest in consolidating their jumble of systems, with the plurality having the strongest interest. Perhaps we will see progress on this front, for this may be as much a practical consideration as an economic reality for sell-side firms.

In fact, Aite found that technology and execution quality have risen to the top of competitive differentiators to win and keep buy-side business. And in multiple conversations with the sell side, trading system consolidation is viewed as a major necessity by most and as an opportunity by a select few.

There are certainly significant system renovation and greenfield projects underway in the OTC derivatives world, including inside sell-side firms. That seems to be consuming the most internal technology bandwidth, at least as of 2015.

But sell-side firms do have project renovation in incumbent listed systems underway as well, and a few are taking on the heavy lifting of bringing listed and OTC together more widely in their firms. These efforts are, for now, focused far more on risk management than trading, however. Will that change in 2016?

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