Multi-Asset Trading Platforms: Sweating Your Assets

For over 10 years, the buy side has been discussing a transition to cross-asset trading platforms. Why now?
There are three drivers for cross-asset trading platforms and platform consolidation: growth, costs and compliance.
Growth in the use of derivative products: Derivatives are no longer considered “alternative” assets and are increasingly a part of the broader portfolio management and trading strategy. Use of different systems to trade those instruments creates challenges to firms looking to gain exposure at the lowest price point, engage in hedging or achieve best execution across portfolios using different instruments for exposure.
Costs: The sheer cost of supporting multiple applications and the growing complexity of these applications in an environment where the market is evolving quickly and IT staff and budgets are being heavily scrutinized, is leading firms to rationalize their existing solutions.
Compliance: Exposure-based rules require a view across asset classes including Ucits, short-selling rules, percentage concentration rules and in-house rules. Meeting compliance requirements is becoming increasingly complicated and virtually impossible with disparate platforms.

In making this transition, how can firms that are already under IT costs scrutiny offset the added expense within their existing budgets?
It’s precisely because of this scrutiny that firms are making the transition to a single, multi-asset trading platform. The ongoing cost of maintaining multiple systems far outweighs the one-time cost of consolidation. This is no secret and something the buy side has known for some time, although the technology of the past was unable to accommodate it. As the technology of trading platforms evolved to support multi-asset trading, firms are now empowered to make the transition. Imagine the cost savings in license costs, hardware, people, processes, and datacenters a firm can realize by combining four separate systems on disparate technology and databases into a single platform. The challenge for many is overcoming that conversion cost and building support for the longer-term return on investment and business benefits. All of that requires a strong champion and support from the head of technology.

What are the key benefits of moving to this platform?
A consolidated multi-asset desk is in an ideal position to identify market pressures or pending distresses in order to fulfill portfolio management requirements, but still accomplish a true best execution for the client. Portfolio managers need only identify the desired exposures to the trading experts to determine the optimal method of gaining this exposure. In order to meet this need, the traders need a single platform that is flexible enough to receive a generic exposure order with the full capabilities to execute that order through cash equities, futures, total return swaps, contracts for difference, or options. Market evolution is also fostering convergence between what were historically disparate asset desk requirements. For the fixed-income and derivatives traders, the evolution of electronic trading is here to stay. For the equity traders, the use of derivatives shows no signs of slowing. All of this means traders operating in historical silos have a lot to learn from each other as these worlds begin to collide.

Can we reasonably expect to embark on cross-asset trading projects without first ensuring the data feeding all their downstream systems is clean and reliable?
Look at the data problem the other way around. The extent to which you capture more data at the time of order generation and execution reduces the need for data enrichment in subsequent downstream applications. The consolidation of platforms actually helps ensure data integrity by reducing the number of disparate reference data schemes, feeds and subsequent data mapping and reconciliations required to run multiple systems. A big challenge for firms today is normalizing data across multiple systems. Data coming from a single source is inherently normalized.

How big of a driver is compliance in this transition?
The swath of regulation over the past few years has been a key driver for cross-asset trading and system consolidation. Regulators have long suspected that asset managers use derivatives to circumvent compliance restrictions, but without adequate rules around these instruments they were left powerless. The regulations have now evolved to keep pace with the dynamic markets to close these loopholes and are now requiring exposure-based monitoring and replacing the antiquated market value-based testing with one which is more aligned with the true risks. For example, a Ucits fund that used to use total return swaps on a commodity-based fund to indirectly gain commodity exposure, find themselves in breach of regulations due to the new look-through requirements on these instruments. Running pre-trade compliance on a consolidated platform is more efficient and reduces missed violations and false positives that otherwise occur when aggregating positions across multiple platforms.

Gene Mitchell is product manager for Linedata Longview.

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