Technological and Cultural Change on the Buy-Side Trading Desk
Eden Simmer, Head of Global Equity Trading at PIMCO discusses the trends that are re-shaping the structure, activities and composition of buy-side trading desks.
GlobalTrading: How has the buy-side trading desk changed since you started a decade ago?
Eden Simmer: The role of buy-side trading has evolved significantly as the equity market has experienced disruptive forces via technology and regulatory changes. Technological innovations have increased efficiency and access to markets. They have also evened the playing field in some aspects as well as introduced new participants to a changing landscape. The speed, computing power, and data capacity advancements have created new investment and trading opportunities. Systematic and quant strategies now have the means to back-test and model historical inputs to try and forecast predictive behavior which can result in trading styles that impacts liquidity and spreads. In addition, regulatory initiatives and the evolution of end-consumer investment styles are driving changes in how funds are structured, marketed and invested in.
Given all of these changes, what worked for a trade desk a decade ago doesn’t necessarily work today. The challenge for heads of equity trading is how to create a team that can successfully navigate the current and future market structure. We are now tasked with striking the optimal balance of trading experience and product and market expertise with the quantitative skills, coding, and analytics to create the next generation trading desk, one that will be equipped to face the challenges of the decade ahead.
GT: Is the regulatory environment (and its continual transformation) helpful or burdensome?
ES: It can be both, but I’d argue that global cash equity markets are transparent and efficient. Regulators have become more collaborative with equity market participants over the years in actively seeking dialogue to try and minimize the impact on end investors and institutions. At the end of the day the regulators’ intent is to create transparent, orderly, and fair market systems to protect investors and facilitate capital formation. Where it becomes burdensome is when regulators miss out on the opportunities to coordinate and collaborate on a global scale, especially given how interconnected financial markets have become. Unintended consequences have become part of any large-scale regulatory reform and can impact a wider scope than what was intended. Enhanced coordination across regulatory bodies can help to minimize this effect as market participants adjust their workflows and procedures to comply with regulatory reform.
GT: How do you keep on top of the many aspects of the trading ecosystem: such as, product innovation, new technologies, evolving trading practices, regulation in different jurisdictions and the emergence of new market participants?
ES: I am fortunate to be part of a dynamic and talented equity team that is highly collaborative and that thrives on change at a firm that emphasizes performance and investment process across multiple asset classes. Being able to build a successful equity desk and team that can handle the breadth and depth of equity trades that a leading global institution like PIMCO requires has been incredibly rewarding. That sense of ownership, entrepreneurship, and accomplishment drives the team and I look forward to thinking about the next challenges we may face and how best to prepare for them. We’re focused on continuous improvement and we relentlessly re-evaluate and stress test our approach to technology and processes.
In addition, I put a strong emphasis on continual education. Similar to how one re-evaluates their process, we also should be constantly re-evaluating and expanding our knowledge base and keep the learning curve steep. Our PIMCO forums, industry global conferences, and industry publications allow us to gain new perspectives and information to tackle the myriad of challenges of the trading ecosystem.
GT: Is there still a role for high touch traders and/or sales traders? Are “human” intuition, experience and networking skills still important or increasingly obsolete?
ES: It is one of the biggest misconceptions that increased automation results in not needing experienced and value-add sales coverage. The skillset and role of the buy-side trader continues to flex, expand, and evolve and so will the role of the sales trader.
Human behaviour drives consumption and investment decisions and while technology has grown by leaps and bounds, especially with the focus in FinTech on artificial intelligence (AI) and machine-learning (ML), it is important to find the right balance of automation versus human experience and expertise.
Robust and continual evaluation of existing processes to create more efficient work-streams and leverage resources will always be a part of any successful trading desk. If a process or workflow requires clicking the same buttons repetitively, that part needs to be automated, but we expect that human intuition and experience will continue to play an important role on any trading desk both in daily decision-making and oversight. On the sell-side, it may require more effort into searching for value-add information and opportunities for their clients, but also provides the opportunity to grow their skillset from past sales-trading models.
Finally, there are many over-the-counter (OTC) and high touch markets that structurally still need human intervention to facilitate price discovery and best execution. A few examples are total return swaps, over-the-counter options and structured volatility trades.
So, while the high touch or sales trader role may not look like it has in the past, it’s important to preserve and create the bridge between historical reference, experience, and relationships of the past trading framework with the technological advancement of the present and future.
GT: Are there particular challenges for women in the trading industry? Is it still a “boys’” club? Is diversity improving and how can it be further enhanced?
ES: On the cultural side we have seen significant improvement from ten years past. Much of that has to do with advancement in data collection. We now have metrics around inclusion, diversity and gender initiatives that can inform, create awareness and track patterns of behaviour around recruitment, retention, compensation, and promotion. Once the patterns are identified, we can create industry awareness around it. When the key decision-makers are aware, they can use the data to inform how widespread this issue is.
An example that I find topical is the lack of women in senior buy-side trading roles. In this instance, we can look at metrics around retention, promotion velocity, and compensation that are more data driven. This allows the equity industry to have deeper discussions given the data surrounding structural hurdles such as legacy networks, role scarcity, candidate pipelines, unconscious bias, and more. Women in buy-side equity leadership positions are a perfect example of key stakeholders to help drive this change at their individual firms by arming themselves with the data, increasing their visibility in the industry, and sharing their experiences to keep the momentum of the conversation moving forward. Companies are another key stakeholder in these discussions and many have done a lot of work and created comprehensive platforms.
At PIMCO specifically, we have a number of initiatives that focus on inclusion and diversity. Some examples are our Investing in “Women & Women in Investing” initiatives which help support gender equality for women globally by seeking to end discrimination and harmful practices towards women and also supporting their leadership globally and within our industry.
However, despite the improvement over the years, there are areas where I would like to see more improvement in the equity trading industry. Structural challenges still remain around the legacy mindset that is anchored in the past. We discussed how technology has become a disruptive and positive force for productivity and efficiency in our industry, but there are still limited trading roles that allow for flexible schedules and working arrangements that will help to prevent burnout and increase retention of high performing traders. I believe that the attitude around taking parental leave has improved significantly but we started at a very low base. Even when companies have generous policies, there still can be a stigma associated about fathers taking their full leave. Additionally, I think work/life balance should be looked at holistically for all employees. Often the focus is on childcare, but it is just as important that firms recognize other forms of care and self-care. There is still work to be done in these areas to change this mindset.
GT: What is your relationship with the sell-side – collaborative or competitive?
ES: It is a healthy mix of both. We are both participants in the same ecosystem and to the end of making the market landscape more efficient, transparent, and innovative we are collaborators. We are also constantly looking for alpha opportunities and cost savings for our clients. Our fiduciary duty is to our clients and our clients always come first which puts us in competition with the sell-side. However I believe competition is healthy and I think that honest and open dialogue with trading counterparts that emphasizes real time feedback on both sides helps to set expectations and creates a framework and relationship of mutual professionalism and respect.
GT: What are the most important skills for a person first starting in the trading industry?
ES: First, flexibility: In our ever-evolving equity market landscape, traders need to be flexible to adapt to changes quickly, whether driven by regulation, market forces, or internal transition and be able to identify opportunities to create alpha and drive cost savings in the changing environment.
Second, strong communication skills: In an industry where communication is heavily electronic, the ability to effectively communicate has become crucial to setting, managing, and meeting portfolio managers’ and client expectations.
Finally, coding ability: The theme has been how technology created a paradigm shift in the equity trading landscape. The ability to read and write code will be increasingly important for new traders to prepare them for the continued move toward automation and electronic trading. In addition, coding skills will help them to process and consume the up-trending quantity of market data which will be critical in the trading and investment decision-making process.
GT: What will the trading industry look like in 10 years’ time and what would you like it to look like in 10 years’ time?
ES: I believe that fixed income and OTC equity products will follow the footsteps of listed equity markets in terms of “electronification” and more efficient price discovery via exchanges and alternative trading venues as consumers and regulators demand greater transparency around executions and transaction costs. This trend has become already become evident in the explosion of fixed income ETF assets under management (AUM) listed on US exchanges which has grown in the past five years from just over $300 billion in 2014 to over $800 billion as of June 2019, according to Barclays, Blackrock iShares data. In addition, global fixed income ETF AUM surpassed $1 trillion in June of this year*.
Trading desks will reflect the shifts of behaviours and investment preferences of the end consumers as AI and ML will continue to play an important role shaping future market structure.
Culturally, we’ll have even more information and data to inform us on various recruiting, talent, and performance tracking initiatives that are currently being undertaken which will continue to drive the evolution of what the 2030 equity trading will ultimately end up looking like from a diversity and work/life balance perspective.
Finally, I believe that this will result in much more diversity in head trader roles. From a gender perspective, the number of female buy-side head equity traders is still very low. I would expect and hope to see this increase. It will take continued industry awareness, dialogue, and data collection around education, pipeline, recruitment, retention, compensation, promotion, legacy networks, and more, but so much great work is being done by companies and individuals in our industry that it seems more of a possibility now than it ever was.