Portfolio trading rise exemplifies need for the innovative OMS

Published on 12 October 2020

Trading is changing, with protocols such portfolio trading transforming the way some asset managers are executing orders. Traders need to adapt to new ways of working, which puts pressure on their order management system (OMS), the workhorse of the dealing desk. Buy-side desks must deliver more multi-asset trading, more digital communication and workflow, while taking advantage of new execution protocols. Yet while innovative OMSs can enable efficiency in trading, legacy tools can be bottlenecks if processes are compartmentalised.

Brett Schechterman, global head of business for thinkFolio at IHS Markit, outlines the OMS innovations necessary to ensure traders can achieve best execution for clients over the next 18 months even in the most choppy markets.

Dan Barnes Welcome to Trader TV, I’m Dan Barnes. This year portfolio trading has really hit the headlines as an efficient way for asset managers to execute orders. However, in order for portfolio managers to communicate with their traders effectively and to take advantage of new trading protocols, they need the right technology on the trading desk. We’re talking with Brett Schechterman, head of business for thinkFolio at IHS Markit, about integrating new trading protocols into trading workflows. Brett, welcome to Trader TV.

Brett Schechterman Thanks for having me, Dan. I’m thrilled to be here.

Dan Barnes We’ve seen some ads really mature over the last 12 months, things like portfolio trading. How do you see that changing the game for portfolio managers and for traders?

Brett Schechterman I think it has unlocked not only the ability to get lots of risk done far more efficiently in a lower cost profile, but it’s also perhaps open the door where maybe less liquid names for each issuer are trading much more frequently or will trade much more frequently going forward. I think the customization, flexibility and the efficiency gains that it offers as a mechanism to trade a basket of bonds right. With a single dealer, given the complexity that’s associated with multi-asset execution desks and protocols, they allow asset managers to trade multiple bonds with a variety of duration profiles, credit quality profiles, liquidity dynamics, directionality as well. Going out to a small number of dealers to facilitate a single block of risk is something that the ETF markets and the explosion in that space is really opened up. That opportunity to do this much more broadly in the context of execution paths that firms can take in the active space as well. Yeah, I think that that entire protocol clearly is where both sides sell side to be investing significantly over the next couple years, the post-Soviet environment.

Dan Barnes What do you think? The challenge is both timely and close communication between the portfolio managers and the trading desk, given it to work from home environment?

Brett Schechterman I’ve been fortunate enough to spend a lot of time on some large buy-side desks with that dynamic between portfolio manager and trader. The insights that are coming by directionally are significant in terms of the dynamic nature of what’s happening, especially in fixed income, around liquidity, around distributing and synthesizing relative value ideas, fundamental credit themes, and portfolio positioning and rebalancing. The fact that everyone’s now working from home or living at work, as I like to say, it really puts an emphasis on the criticality of the technology and the role that we play in fostering straight-through processing and full audit capability. At the end of the day, in terms of where we sit in the market, were thinkFolio sits, we know the criticality in terms of what it means for the regulators, what it means for ongoing compliance and full audit trails in terms of how people communicate, making sure that C-suite technologies responsible for technology at these fireside shops, can feel confident.

Dan Barnes So what are the challenges in engaging in portfolio trading and what do invest managers need to consider to accommodate that within their trading workflow?

Brett Schechterman You need to be able to understand the liquidity profile of the underlying securities in the basket, understand the diversification profile, because ultimately the comfort level for the sell-side to ultimately make a market in that particular basket is going to drive a lot of these things. So what sectors with credit quality, individual names, securities, what the ETF overlap might be in terms of their trading and similar names and their inventories configured on that basis, the size of the portfolio, you have to iterate and come up with the right composition, sizing individual names, the overall profile, and then ultimately, based on your relationships, decide which of your counterparties is this best to show? Is it better to go through the electronic protocols, perhaps. Where has there been a lot of developments from several of the leading electronic vendors more recently? Or is this something where a bilateral discussion with a few of your well-known, best relationship counterparties is going to come into consideration? But I think you have to iterate between PM and trading. You might have to replace some line items given the liquidity profile. You might be using some optimization techniques. You have to have technology in place that can accommodate that back and forth. It’s not going to be, what you started with is what you go to market with necessarily. There could be several iterations before you get to the right basket that you’re both comfortable pricing from a risk perspective in terms of price making and then the counterparty and how they get comfortable ultimately working with you on that basis, so the technology workflows from PM to trading, the connectivity and the risk insights, the liquidity insights need to be part of the desktop mosaic. And that’s where I think there’s going to be a lot more innovation coming.

Dan Barnes What do you see as being the specific innovations which will allow these protocols to be leveraged more broadly?

Brett Schechterman It’s being able to leverage best-in-class capability for each stage of the life cycle and having an open architecture to stitch these together into a seamless workflow. I think otherwise we create these bottlenecks in the process, ultimately it ranslates to slippage, timing issues. So I think the market leaders in this space have set the bar in terms of how you need to invest technology-wise, to bring these insights into the free trade context, to enable the buy-side and sell-side to comfortably price risk. At this level the volume speak for themselves. I’ve heard data points just this year that some see ten to twenty five percent of their overall trading book on fixed income going the portfolio trading protocol route. So it’s a massive shift in a very short window, but it just tells you  people are excited about it because I think they see the benefits that we’ve already discussed today

Dan Barnes Thats excellent. Brett, thank you very much.

Brett Schechterman Thanks, Dan. Really appreciate the time, looking forward to the next one.

Dan Barnes I’d like to thank Brett for his insights today and of course you for watching. To catch up on our other shows, also subscribe to our newsletter, go to TraderTV.net or ETFTV.net.