The 2020 liquidity crisis: How traders can handle it

Published on 15 March 2020

The liquidity crisis in March 2020, brought on by a combination of coronavirus, oil trade wars and the central bank responses, has left traders reporting one-sided markets in major securities. This puts buy-side desks under massive performance pressure. If assets cannot be bought or sold, the investment strategies set out by portfolio managers cannot be put into effect.

Trading desks that have invested in technology and are structured on trading by liquidity profile instead of asset class, can give asset managers the efficiency needed to trade high volumes at high speed wherever possible, says Gianluca Minieri, deputy global head of trading at Amundi Asset Management (€1.4 trillion AUM).

He reflects on what this crisis can tell us about trading operations today, and the potential changes asset managers may need to make in order to come through it.

Dan Barnes Welcome to Trader TV – your insights into trading for professional investors. I’m Dan Barnes. Markets are in turmoil and asset managers are under enormous performance pressure. We’re asking Gianluca Minieri, deputy global head of trading at Amundi Asset Management, about how buy-side trading desks can be designed to handle high volumes of orders across asset classes within margin-constrained businesses. Gianluca, welcome back to Trader TV.

Gianluca Minieri Hi, Dan, thanks for having me again.

Dan Barnes How would you describe market conditions today for traders?

Gianluca Minieri If we look at the trading blotter today, you will see something completely different from what you would see last week. The reality is there is no liquidity and prices are everywhere. OK, so what does this tell you? It tells you that most of the time liquidity is there when you don’t need it. Efficiency means that when a client give to us the mandate of managing his order, what we can offer to him is to be in the hands of someone that is destroying the infrastructure, the organization, the power, the means to run a complex machine, but at the end of the day can give you what we are looking for, so liquidity at good prices.

Dan Barnes What sort of pressures are buy-side firms under at the moment to restructure their trading operations?

Gianluca Minieri The buy-side dealing function is actually currently facing a number of challenges that are going to be the catalyst for a profound restructure of this type of function. The first one will be cost, according to a very recent research that I’ve read, the cost of a buy-side trader to the company. The cost to the company may end up being approximately 350.000 euro. So that means that a small trading desk of three people, which is the minimum set up, might cost up to a million euro and is a small trading desk that will have a limited capability in terms of cross-asset trading and time zone. The second one will be regulation because since the crisis of 2008, financial markets have been impacted by a number of very large pieces of legislation. So, there is have been a significant increase in the regulatory burden of companies. The trading desk has become pretty much a risky and demanding business to run. The third one, probably the most discussed over the last few years, has been technology.

Dan Barnes So what might buy-side firms do to restructure their operations?

So, the first thing is automation. These will allow us to free up time for our traders to dedicate to activities where they can really add value to the investment process. The second one is a change of model. Up to a few years ago, our traders were divided into asset classes. So, you had the typical fixed income trader, the equity trader, the derivatives trader and so on. But technology and electronic trading have led some instruments to be traded in a similar way. So, the way we are reorganizing our teams today are based more on liquidity clusters, rather than by instruments. It is a reality that today if you don’t have a global, integrated infrastructure, capable of managing all of your orders from inception to completion, liquidity is a losing game. The market is now mature for outsourcing trading. 20% of buy-side, in the next five years, will look to cut costs, and they will include trading in their synergies. This means that they will look for other people that can execute the orders on their behalf.

Dan Barnes What are the complexities?

Gianluca Minieri The complexity is probably on the service providing side. Today, it’s quite easy to outsource your trading – All you need is connectivity. So, we feel that the complexity will be ensuring that your orders will be treated fairly together with our orders. You need to ensure that your trading protocols are safe, your trading protocols are secure, and that the client is confident that the overall process, the overall governance of these processes is safe.

Dan Barnes As far as the liquidity profile model for trading goes, and increased automation, what sort of complexities have you faced there?

Gianluca Minieri When you have a powerful machine, you will need people that are able to maneuver that machine. Just to give you an analogy, I think that when you drive a racing car, you need to be even more skillful than if you drive a normal car.

Dan Barnes How are you addressing those complexities internally?

Gianluca Minieri We are 100% focused in building the trading organization of the future. So, the challenge for us is to think a little bit out of the box. I think the next stage will be how to unlock the huge amount of frozen bond and stock inventory that the buy-side have.

Dan Barnes So you see internal efficiency providing that liquidity and the fluid trading?

Gianluca Minieri Absolutely. One thing we put a lot of emphasis on is the relationship with our counterparties. We like to work with counterparties with which we can build a trusted, long-term, business relationship. So, it is this type of counterparty network that is key in a moment like this, to be able to step in the market and find liquidity. This counterparty knows that, you know, if they don’t provide to us liquidity now, you know, it will probably not be worth working with them in the future. This type of business relationship is much more difficult for small and medium players in the market.

Dan Barnes Ginaluca, thank you. That’s been fantastic.

Gianluca Minieri I hope that when everything will be finished with this virus, I’ll be able to be there in the studio again.

Dan Barnes Absolutely. Me too. Thank you very much.

Gianluca Minieri Thank you.

Dan Barnes I’d like to thank Gianluca Minieri for his insights into multi-asset trading and of course, you for watching. To catch our monthly reports on other markets or to subscribe to our newsletter, go to TraderTV.NET or ETFTV.NET.