The Rise Of Technology
By Gianluca Minieri, Global Head of Trading, Pioneer Investments
Over the last few years, the debate around the growing role of technology in the trading space has been one of the hot topics in the industry. It is unfortunate that due to growing concerns surrounding the wider HFTs topic, this debate has very often generated a negative perception of the role of technology in the financial services industry. I am generally considered to be one of the most sceptical voices in the industry in the whole debate about HFTs. The fact is that some of the discussions around high-speed trading and HFTs have become pure science fiction. Last year a press agency published the news that companies had started to use laser beams military technology and microwave dishes in an attempt to shave milliseconds off dealing time while behind the scenes others were planning to trim thousandths of seconds off execution time using drones as platforms for wireless links. I genuinely find these discussions surreal and think that we have gone too far. We seem to have lost sight of the fact that the primary purpose of financial markets is not to offer a place where speculation and short-term profit can flourish but to serve the needs of those supplying and consuming capital. The final objective should be to create a financial system that is capable of supporting companies seeking to raise moneyto invest into the real economy, so that their business can grow, create jobs and bring benefits to people and society as a whole.
I am proud to work for a company that puts fundamental analysis and the value of companies we invest in at the core of the investment process. In Pioneer Investments, we are in favour of technology and we strive to use it to exploit opportunities with the aim of providing a better service to our clients.
Technology is not only about high-speed. The advent of technology in trading has brought many positive things. It has enhanced the efficiency of financial markets, improved transparency and increased the degree of control that the buy-side trading desks have over their orders, just to mention a few. One year ago, this strong conviction led us to embark on a significant technology investment, on-boarding a global multi-asset order management system (OMS) capable of bringing all our trading desks around the globe onto one common execution platform, thereby providing the capability for greater support and more efficiency across different hubs. The concept of the global trading model, inherent in our new OMS, is the capability, where needed, to route orders to local trading desks and execute them in local time zones leveraging local market expertise at no additional cost. This global model will eliminate some of the inefficiencies of the trading process and should ensure enhanced capabilities to support the growing demand for multi-asset global products with potential for an enhanced price discovery process and better quality of execution.
Within the same initiative, we have also implemented an advanced execution management system (EMS) embedded into the OMS, which has been designed to complement and enhance the execution functionalities of the OMS. The new EMS has not only dramatically increased the percentage of trading volume executed electronically but has also enhanced traders’ capability to source liquidity from all available sources, from low touch and DMAs to algo trading and dark pools and to make that choice with the speed that today’s trading environment requires. The latter is critical when you have trading volumes in excess of 500 billion Euro annually across all asset classes with a huge variety of requirements and criteria in terms of how best to achieve best execution.
We feel that centralising all our trading activity on a common technology platform has given us an edge in terms of improving our trading capability overall and could put us ahead of the curve vis-àvis our peers and competitors. We believe it can result in a quicker decision making process, letting the firm react faster to volatile market conditions which may require a quick change in the trading strategy. The latter will minimise our alpha slippage rate, reducing the cost of trading and will eventually help deliver better performances to our clients.
Cross asset-class trading should also be easier to manage on a single global platform, especially for those multi-asset mandates which provide for investments in both fixed income and equity across regions, sectors and currencies.
This is an example of technology that is designed to serve the need of end investors and not the other way around and is a confirmation that technology can be of mutual benefit to investment firms and their clients, by improving execution quality, cutting down on manual inefficiencies, and reducing risks and costs.
In our view, other market participants are eager to explore how technology can help them to achieve the above-mentioned objectives and increase the percentage of trading volume that goes through electronic platforms. In my view, the degree at which this process will unfold will depend not so much from financial budget constraints but the capability of regulators and policy-makers to satisfy the basic requirements to establish a level playing field amongst all market participants. It is of critical importance that these actors are unquestionably perceived to be impartial when setting the rules aimed at creating more transparency and increasing the percentage of trading volume on platforms. Our primary objective is always to achieve the best trading outcome for our clients and if we feel that such an objective can be achieved away from electronic market, we will continue to do so by trading in a high-touch fashion in order to minimise market impact and protect the confidentiality of our orders.
Pointless to say, the situation is very different between equity and fixed income markets. While equity markets have probably gone “too far” from a technology perspective, creating the need for regulators to slow down the pace at which orders are executed, the fixed income world is still at an early age of development from a technology point of view. Despite the increasing number of electronic trading platforms and dealers, in fact, the liquidity in the secondary markets of these instruments has been constantly reducing over the last couple of years, mainly due to the lack of information and communication between them.
When you have so many different venues each with a different set of communication standards, the search for liquidity becomes extremely difficult and creates a gap which only human intervention can fill. In our view, the role of technology in this space has to be aimed at creating some form of aggregation tool which can act as a source of liquidity. In order to do that, the creation and adoption of a common language by all venues in terms of standards and the development of a communication network between them is a prerequisitefor a real development of the fixed income market. Especially in the more illiquid instruments, where the need for more transparency is increasing, these challenges are harder to get addressed through electronic platforms. Well calibrated post-trade transparency rules for these types of instruments might be crucial to give market participants the confidence to rely more on what they see on the screen, which in turn will make electronic trading more efficient. This point is an obsession for me and I try to reinforce it every time I meet with brokers. There is still a lot to be done on RFQ protocol, where brokers still freely advertise prices at which they are unwilling to trade. This practise has to be discontinued and we, as buy-side, should all aim to put more pressure on to promote more reliability of prices and push for more automation. It is clear that no single company can afford to lead this by itself. That is why we continue to be very proactive with vendors,peers and the sellside on every proposal that is aimed at enhancing quality of execution by standardising connectivity through multi-participant networks. We believe that the buy-side should continue to have an active role in this space and together with all markets participants should push for an industry-led solution, including the sell-side and exchanges which so far have not always had a proactive approach to addressing these issues.