The complexity of new execution protocols and multi-asset trading means dealing desks on the buy- and sell-side need to reassess the technology they have available to structure their workflows. Pontus Eriksson, strategy director at FIS, gives an expert view on how trading teams can review their processes in order to build a technology infrastructure that will support both voice and electronic execution.
Dan Barnes Welcome to Trader TV – your insight into the trading climate for professional investors. I’m Dan Barnes. To deliver best execution in volatile markets, traders must have the ability to segregate between high touch trading with a voice or electronic, and low touch, more automated trading across assets. To discuss how to build that trading operation, we’re in the studio with Ponuts Eriksson, strategy director at FIS. Pontus, welcome to Trader TV.
Pontus Eriksson Thank you. Thank you for having me here.
Dan Barnes So the first question I have is what sort of pressures are buy-side firms facing to make trading more efficient?
Pontus Eriksson I think buy-side is under significant pressure specifically from a cost perspective. They have to look for improved fees. They have to understand that the market is moving from active to passive management to a large degree.
Dan Barnes And do you see that affecting the way that they approach trading?
Pontus Eriksson It does, because they’re looking at much more technology these days. They try to look for cross assets OMS systems. They want to streamline their operation and be much more efficient and grow the business.
Dan Barnes And what are you seeing from FIS clients in terms of moving towards a more electronic trading approach?
Pontus Eriksson Our FIS clients are typically the big and small sell-sides, and the big and small buy-sides. If I start on the buy-side, they ask for cross asset; they want to be able to trade and have advanced macro-strategies, and they want to have order management on it on a cross asset basic. That’s relatively few vendors who can do that, and I mean, not just cross asset in the sense that you trade equities and equity options, but cross asset across the entire palette of products from OTC to fixed income to FX.
Dan Barnes That can be very challenging to have on a single platform?
Pontus Eriksson Yes, it is. But that’s ultimately what the market wants, and I think the market also wants to tie together the OMS and EMS business. So, we’re seeing OMS providers moving into EMS land, and EMS moving into the OMS turf. So I think, that the market’s wish is for this to come to fruition in a couple of years time, but right now, I think we’re not there. If you look at a specific asset class like convertibles, a highly specific product, when you typically have auto management for these kind of products, you typically want a hedge done with equities. So, you have to deal with them as a package where you basically route the actual convertible, plus the equity hedge, and then you need to dissect them into two pieces and send off the equity to the exchange and the convert via the traditional OTC flow. And that’s quite challenging, because then you have an electronic workflow that is melded together and that needs to be then dissected again. Other things we see is there’s a lot of development in the securities finance world, so people trading security loans that previously were completely voice-driven, a lot of them are now trading electronically on platforms.
Dan Barnes There used to be a distinction between certain instruments as flow products, but perhaps that’s breaking down a bit or changing?
Pontus Eriksson It’s just a grey zone these days, because if you look at bonds fx, they can be traded on an RFQ model as opposed to a central limit order book typically for equities. Yeah, but it’s much more complicated if you go to OTC fx, because then you have a multifaceted way of doing RFQs. Maybe you had a serial RFQ, because you’re awaiting an answer from the XDA desk. Maybe you have a parallel instance of RFQ, because you’re trading in an FX swap or a complicated product that consists of two legs, and you essentially need to route it into two different places. And sometimes you have corporate flow coming in from a web interface, and sometimes you have FIX directly and DMA. All of this together, forms the complexity of everything you need to cater for, and that becomes complicated, and you need technology to maneuver all of this.
Dan Barnes We’ve talked about both equities and fixed income. What are the technical challenges to put those sorts of instruments on a single platform?
Pontus Eriksson First and foremost, you have to be able to price these instruments. So what we are thinking at FIS, is you need to be able to price them first so that is key, and then when you have a platform and if you look at a traditional equity OMS system, it’s difficult to shoehorn OTC products and fixed income into that, because they are vastly more complicated. Rather, it’s the other approach you need to have. We have invested a lot in trying to understand these different types of RFQ models, and how they work and how you want to operate them. So that’s, I think, what the secret is; to be able to understand the multitude of the few and combined with centrally limit order books.
Dan Barnes And having that situation where you’ve got a fixed income product and an equity product that you need to trade simultaneously. Presumably they have quite different liquidity profiles. So that must be challenging as to determine whether you voice-trade electronically or how that works?
Pontus Eriksson Absolutely. I mean, to get back to the convertible example, that’s of course, the case. So, it’s highly OTC versus liquid equity, but that’s the way they want to trade. And it’s very common in certain parts of the world where we have clients, that they trade structured products. It could be a combination of a bond, plus equity options, or an FX strip, or it could be all kinds of structured products together. So, think of it as a series of strips or series of legs or something like that. And they want to bundle that easily together, and they want to be able to market it, if they are on the sell-side. On the buy-side they want to be able to trade it simply. I think we have to respect that there’s more vast and different needs if you are a high performing equity trader versus the traditional OTC. But I think it is the wrong way to start to take an equity platform and try to shoehorn in fixed income and the other products.
Dan Barnes Pontus, that’s been great. Thank you very much.
Pontus Eriksson Thanks a lot, Dan. It’s been great.
Dan Barnes I’d like to thank Pontus Eriksson from FIS and of course, you for watching. To catch our monthly reports on other markets, or to subscribe to our newsletter, go to TraderTV.NET.
Excellent interview. Considered commentary and useful information from this leading fintech provider!