Best execution must define trading decisions in turbulent markets across assets

Published on 4 April 2019

A trading desk needs to be very structured if it is to enable high-tough and low-touch trading across asset classes. That requires expert domain knowledge, strong data and well-defined processes so that even when markets are turbulent, testing these parameters, the right decisions are being made. Speaking at the FIX Global conference in London, Christoph Hock, head of multi-asset trading at Union Investment broke down what is necessary to support best execution for multi-asset trading in this environment.

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 speaking with Cristoph Hock, head of multi-asset trading for Union Investment at the FIX Conference in London. Christoph, welcome to Trader TV.

Christoph Hock Thank you, Dan.

Dan Barnes So, to start with when do you reach for the phone to make a trade rather than trading electronically?

Christoph Hock So actually, it’s less about when do we trade electronically, when do we trade voice. The key question behind us is, ‘how do we achieve best in class execution for foreign investors?’ And typically it’s related to the liquidity of the instrument and to complexity of the order and also related to volatility in the market. So, this are the three determining factors whether to make use of electronic pipes or whether to make use of voice. And that’s something which is not just applicable for fixed income markets, but it’s a phenomenon that you’ll see across asset classes.

Dan Barnes So there’s a perception that equities is very electronic. But of course, if you’re trading small caps or very large blocks, that might sometimes be better done with the voice trade?

Christoph Hock So when taking, for instance, highly illiquid, small cap names in the equity space, where your portfolio manager has potentially a 2% stake of the company as a position in the portfolio, there’s no way that there’s a possibility to get this position done, to sell a position like that, purely in the lit market on the primary exchange. You need to have a network, you need to have access to the very best sources of liquidity. And in this example, it’s essential that you have access to the syndicate, to the ECM teams of broker firms. In fixed income in an example, where you have to trade a big block of a less liquid ISIN, there’s also no chance to trade this fully electronic, potentially putting 5, 6, 7 counterparties into competition, where you have a humungous leakage of information and an adverse price movement. It’s something where you also have to be highly sensitive when executing such a transaction, where potentially you also only go to one counterparty, rather than a variety of counterparties.

Dan Barnes And how does market volatility affect that decision making process?

Market volatility obviously has an impact on A; on spreads, and B; on the willingness of dealers to make prices for a decent size. So typically, whenever you have high volatility in the market, then again, that’s applicable for all asset class or spreads are widening and the willingness to show large clips, but prices for large clips is diminishing.

Dan Barnes Now you’ve actually built a very high touch and low touch business on your trading desk. What’s been necessary to build on the trading desk to enable that low touch business?

Christoph Hock On the one hand, it’s necessary to really keep the competence about the asset class you are trading, taking the specifics for this asset class into account. And on the other hand, it’s important to have the technology know-how, so how to implement a kind of auto-trade functionality for the low touch business, or for the business where literally you have humongous liquidity, you don’t have an impact. It’s a business where typically the quality of outcome, the execution quality is either equal or even a touch higher than when being traded by humans. For the investor that’s the key message. Regardless whether low touch or whether high touch business, it’s essential that we deliver best in class service to them.

Dan Barnes Are you seeing data necessary to support automation being the fuel of automation? Is that data quality there at the moment in fixed income? Is the quantity of data there in fixed income? How is it supporting automation in your view?

Christoph Hock So data is in general a key driver for the entire business, regardless whether it’s low touch, regardless whether it’s high touch, regardless whether it’s fixed income FX or equities. Price discovery, in this context to mention, and on the other hand optimal sourcing of liquidity, it’s also finding the right execution style for each type of order. It’s really supported by having a good aggregation and quality of data.

Christoph Hock Christoph, thank you very much. Pleasure. Pleasure, Dan.

Dan Barnes I’d like to thank Christoph Hock of Union Investment, and of course you for watching. To catch our monthly reports on other markets or to subscribe to our newsletter, go to TraderTV.NET.