Review and analysis of a market event

Published on 6 December 2019

Following a rate decision by a central bank, or an election, the process that investment managers took to approaching the event and then engaging with it need careful scrutiny in order to optimise both trading and portfolio decision making in the future. James Athey of Aberdeen Standard Investments, Sean George of Strukturinvest Fondkommission and Mattias Remnefjord of FIS give tips on how to capture, analyse and use data post-event. Supported by FIS.

Dan Barnes Welcome back to Trader TV Live, in conjunction with FIS. We’ve covered the trading that investment managers, banks and risk managers have to manage and engage in during a known market event. Now, let’s discuss, post event, how that is analyzed, because in terms of your review and reporting process for post-events analysis, what sort of processes do you have? To start with you, James?

James Athey Yes, sure thing. So, I mean, essentially what we’re talking about here is a sort of microcosm of the broad process, and that is to say that it needs to be robust, repeatable and iterative. And so, information that we can take from how markets have responded, how our portfolio has responded, our understanding going in, and how that compares to the reality coming out, that’s all useful information to us to feed back into the process, to make sure that, you know, essentially we’re being as robust and as careful and as diligent as we can. In that respect, we have a series of meetings on a weekly basis, where we can have these discussions, both in terms of what the future may look like, but also going over the past. How did events transpire relative to our views? How has that affected our portfolios? Does that require some adjustments along the way? So, absolutely, that fits into the normal sort of process. In the rare instances where something really has come out of the blue or shocked us or surprised us, we will have a conversation there and then, because we need to in real-time, truly understand, because obviously we have client money, you know, at risk, if you like. And we’re very careful about that.

Dan Barnes And that’s very good. And Sean, does your review process differ at all?

Sean George It differs, I mean, essentially, it’s the same process. But the difference is I have a larger toolbox being that leverage longs and shorts, multiple different markets. What we do, what I would add on to the process, we have a smaller team so that it’s more ad hoc, you know, discussing if he did the right thing or not. But we also go back and we look at what markets were tradable at the time, and did we execute the most efficient market to augment our view if we needed to do it at the time. So, just making sure that, I’d like to think that we do check all the markets, and make sure we’re shorting the richest thing and buying the cheapest thing. But sometimes it’s not the case. So, we do go back and review and, you know, it has changed a couple of things on how we’ve handled liquidity.

Dan Barnes That’s very good. And then how do you bring the sell-side and risk teams into that discussion? Because I’m guessing portfolio management and trading is an ongoing discussion, probably on a daily basis or at least weekly basis. So how do you bring those other factors in, including counterparts, James you can start?

James Athey Again, that’s a process, and you’re talking about, actually probably, two distinct sort of segments, one of which is, is the notion of best execution. We have a responsibility to provide the best execution that we possibly can for our client base. And that process is essentially ongoing. It’s always and everywhere. Now, depending on which asset class, some of them are more automatable and some of them are more sort of minute by minute, if you like, when you’re talking about OTC products and illiquid products, it can be a bit more nuanced. And there does need to be a bit of expertize in understanding market conditions, and where, what may look like a bad price is actually a relatively good price, because of the prevailing conditions at the time. And then obviously you have a separate conversation, a separate process and relationship with our counterparties, who are providing us that liquidity and execution as well as other services. And that process is certainly much bigger than our desk that covers all asset classes. We have specialist teams and specialist people that are involved in a kind of quarterly review process.

Dan Barnes And you have a quarterly review process as well, Sean?

Sean George Exactly. And since we’re an emerging manager, you know, it’s a give and take on how helpful we are to our counterparties and how useful we are. Our trading volumes matter to certain counterparties and maybe not so to others. I think at the end of the day, when you come in with the numbers and with the rankings, very seldom are people like, ‘oh, my God, I’m fifth!’ I mean, they kind of know if they’re hitting or missing out on things, but it is also a good check point to see, ‘the people that are providing me with the best service, are they also getting the same look on the volume because you want to reward good behavior?’

Dan Barnes Absolutely. And Mattias, you talked about the importance of systematic performance and system integrity in the trading process. What sort of data can be used to analyze that? And how do you see the review of operational performance?

Mattias Remnefjord It depends on our desks, but if I take an example; a bond desk giving prices to venues in RFQs, for example, it is a matter of publishing the relevant data for the traders. So, it can be like some liquidity score numbers that are provided out there with vendors, and also the composite price to do that. And the banks on the sell-side, as the buy-side, they are gathering a lot of data and using it. And it is a matter of presenting the right data in that moment, because if it is in a shaky situation, there might be a lot of RFQ pop-ups on the screens. So, it is a matter of showing the right data rather than just sort of showing a myriad of too much. So, that is also something that can be, of course, revised afterwards. OK, the right number, the right liquid scores and the right sort of composite price and so on. But on the sell-side it is also a matter of trying to explain the panels, for example. So reviewing processes, they also have the MiFID II requirements on the best executions, and some RTS, repo and all these things. But something that is common among all classes, that try to explain to the panel how you ended up in that one. So, they look at, OK, how much is coming from moves in a credit card? How much is on the panel is coming from time decay? If there is some shift on inflation currents, for example. So, it is a matter of trying to explain that and sort of try to understand it, but I mean to reviewing a certain sort of risk measurement on a sell-side. They have pretty robust rules from the beginning, so it’s not like the traders in sell-side, they just need to sort of stick to that. Of course, they are going to have inputs, but I mean, the process of reviewing these things is pretty, pretty massive at the bank, so, it’s not like they cannot change it over a short period of time.

Dan Barnes Sure. We’ve heard a lot about it in the press about transaction cost analysis, on the buy-side particularly, we’ve seen fixed income that’s challenging because there’s less market data, because there’s less liquidity. So, just to finish, could we perhaps talk about how valuable is that in the review process, do you think, at the moment? And to what extent do you think, is that art as well as science? Sean?

Sean George Yeah, I mean, we go through and score our liquidity on the on a weekly basis, and we produce our monthly report on that. And what we do is we gather, on the buy-side, we have the… One thing when you go from the sell-side to the buy-side, you’re amazed at how much more information you have. And so we take all the liquidity, we monitor our bonds and make sure they have the liquidity profile that we want. Because, you know, if the market were to turn for some macro reason, and I have a bond that I thought was liquid in an illiquid market, I won’t be able to sell that bond. So I need to stay more liquid and on top of my liquidity. And we do that review on a weekly basis.

Dan Barnes That’s great. We’re gonna have to wrap up there. So, Sean, James, Mattias, thank you very much. That’s been excellent.

All Thank you.

Dan Barnes The recording of the show will be available on this page, as well as TraderTV.NET. I’d just like to thank James, Sean and Mattias, and you for watching Trader TV Live. Please follow us on Twitter at Trader TV. And visit us at TraderTV.NET and ETF.NET. Thank you very much for watching.