Breaking Down Boundaries:Multi-asset Trading

State Street Global Advisors’ Head of Trading in Asia Pacific, Stephen Mantle, talks about the investment decision making process and the firm’s pioneering multi-asset trading capabilities.
Investable Universe
State Street Global Advisors (SSgA) has a global platform, further enhanced by internal customisation, which enables us to cater to client demands. These internal capabilities can customise to just about anything, and our aim is to not only meet the client’s demands, but exceed them.
We cover something like 800 indices for our clients, so there’s not very much that we don’t look at. At the end of the day, the investable universe is defined by the client; what the client needs and what the client requires.
Frontier markets present different challenges, including some delivery versus payment issues, counterparty issues and head-winds with regards to credit risk. However, these are concerns that we constantly look at to help us offer a broader platform in these markets.
Existing and new clients, in their search for returns in difficult market conditions, are looking for more customised benchmarks and increasingly customised portfolio solutions. This is an area in which we are expanding and continue to pay close attention to.
The Role of Trading in the Investment Decision Making Process
A few years ago being a portfolio manager and a trader were two very segregated jobs: PMs made the decisions and traders tried to implement them. However, the two jobs are now much closer together, and the traders are part of the investment group. In today’s environment, the PMs consult the traders about the construction of the basket with regards to liquidity and other issues. There is dialogue throughout the implementation of the basket. There will also be a conversation afterwards with regards to market impact and how we can improve the process.
As a further safeguard and to ensure smooth communication, State Street has PMs stationed globally, and the teams will have local specialists. Therefore, if we can’t contact the PM, we can always contact someone that is stationed here in Asia and they will be fully briefed on how the basket should be implemented.
The Impact of Electronic Connectivity
Dealing in different markets was more of a challenge a few years ago; electronic connectivity has made trading in multiasset markets much quicker. In futures, electronic trading is only a few years old, and there are now products allowing you to electronically trade FX. State Street prides itself in being at the cutting edge of electronic trading. To give yourself an edge in these markets you need to use all the technology that is available to you.
One feature that State Street is particularly proud of is that in Boston and EMEA all four asset classes are traded from the same platform. In Asia, we trade three out of four asset classes – FX, equity and futures from the same platform. Equities and futures have always been together, because it is a natural match, and we gravitated FX to the same desk in Asia about three years ago. Furthermore, high level discussions are ongoing, and fixed income is in the process of being migrated to the desk.
The advantage State Street has from using the same platform is if the trade is contingent, they will trade together. We know what each class is doing within the basket and we can trade each component according to its relationship with the others. This is a huge advantage when we’re implementing multi-asset baskets. It also mitigates risk and reduces implementation errors.
At SSgA we have had an internal TCA department for ten years, and it covers all four asset classes. All of the TCA data comes from the trading systems, so we know it’s reliable. It is becoming an increasingly important part of the investment process, both pre- and post-trade. The importance of having a TCA department for a long period of time is that it is impossible to look at two or three quarters’ worth of data and spot trends. It takes a lot of data to draw reliable conclusions, but we have the depth of data, and it is robust and accurate.
Client Involvement
Clients are looking for ever more integrated solutions. If you can gravitate as many asset classes to the desk as possible, then you’re improving your chances of getting the best implementation with the least risk.
Furthermore, trading FX live in Asia, rather than waiting for London or Boston to come in, creates a tangible difference in TCA. As a consequence we’re very close to doing our first restricted currency trades, pulling them away from the custody part of it. We know when the restricted currency is going through because we’re doing it ourselves.
Broker Relationships
The change towards multiasset trading makes my job more interesting, because as a desk head, my relationship used to be with equity and futures contacts at the brokerage community. Now I have FX, so I have a new contact. Upon being told I was getting FX I had to go and learn about it.
As a result, the relationship with brokers is becoming more complex, but the centralisation of the roles makes communication significantly easier.
Better Technology
On the matter of technology, the brokerage communities are doing a good job. Algorithmic trading and electronic platforms with regards to latency and algo-suite offerings are extensive; they’re efficient and they work. There’s now electronic futures trading and soon there will be electronic FX trading algorithmically at more than one brokerage.
One area I would like to improve is liquidity, which continues to be the biggest challenge in Asia. The question is, how we achieve that? Whether through aggregated dark pools or fragmentation. There are more liquidity venues now, and we are seeing fragmentation in Australia and in Japan. Proprietary trading systems are probably 10% of the market now. There is some traction, but fragmentation in other markets in Asia has headwinds. So my wish list would be better liquidity and aggregated dark pools, but that’s for the future.