CROSS ASSET DERIVATIVES
K&KGC - Key findings from the ATF 2nd half 2018
On the 9th October 2018, The Buy-side Trading Community (BTC) by K&K Global Consulting (K&KGC) widened its scope of the private, exclusive, invitation only Alpha Trader Forum (ATF) buy-side trading roundtable debates with its inaugural cross asset derivatives meeting in partnership with BNP Paribas, CME Group and Fidessa. 22 heads of derivatives trading from the largest global and European asset management firms were represented at the meeting in London.
Anita Karppi, Managing Director, BTC by K&KGC said; “The buy-side heads of trading had flagged the need for derivatives traders to meet and discuss how to improve their processes for the last few years. The buy-side trading community are increasingly establishing more cross asset derivatives trading functions and it made sense for us to cater with our specialisation of bringing the buy-side community together to discuss how they could improve their processes at the derivatives dealing desk. Ultimately all of our activities are in the best interest of the end investor. The conversations at our first ATF cross asset derivatives meeting highlighted areas in need of optimisation and the only way to resolve such challenges is for intelligent people to meet and discuss. We have already had similar conversations for trading within cash equities, fixed income bonds and foreign exchange over the course of the last 10 years and I feel we have contributed to the evolution of the buy-side trading desks in these areas.”
Most European based asset management firms have invested in legacy OMS infrastructures which from an interoperability and cost perspective limits the range of other trading technologies that can be adopted to the trading desk. Several OMS vendors in the industry have or are undergoing takeovers by larger firms so it will be interesting to see how that will impact the development of the existing technologies.
The choice of OMS brand has often been driven from a cash asset class perspective and rarely caters fully for the more complex requirements of the derivatives trading desk.
The meeting highlighted the availability of derivatives centric trading technologies on the market and the buy-side firms need to evaluate if the workflow improvement from a best-of-breed solution is sufficient to cover the incremental savings on the trading desk.
The derivatives trading desks are increasingly being catered for with new types of trading algorithms. This is an area of focus and still in development with such a wide range of instruments.
The ATF participants also discussed the benefits of straight through processing (STP) with better real-time information flow between the clearing houses, brokers and buy side to optimise the use of capital and collateral.
Data, transaction cost analysis and best execution
Best execution was formally regulated for derivatives with the implementation of MiFID II on 3rd January 2018. There are still a number of underlying areas such as aggregation of data and electronification of derivatives trading needed in order to find similar levels of efficiencies in the process of evidencing best execution as found in for example, listed equities. Any information and analysis will never be better than the quality of the underlying data and this is another challenge for the heads of derivatives trading. Whilst the analytical models are not complicated, there is a lack of electronic consolidated data. 38% of the participating buy side are currently manually aggregating the data which they add to their in-house built analysis tools to make more informed decisions. 31% of the trading desks have no TCA solution at all. Those firms that do have TCA in place, experience various degrees of business benefits from their chosen solutions.
Brokers and venues
Most of the buy side are trading derivatives bi-laterally with their broker relationships. K&KGC assisted the buy side with consolidating a benchmark among the buy-side participants of which factors to consider in their broker reviews which is a fundamental component of the formal best execution process. In the short term, the broker relationships will undoubtedly be focused on how to overcome any Brexit challenges and in particular in the event of a hard Brexit on 29th March 2019.
Listed vs. OTC derivatives
Global regulation is increasingly incentivising the market to trade more derivatives on listed venues for increased transparency. The decisions of which instruments to trade ultimately lies with the buy-side heads of derivatives trading and their firm’s portfolio managers. They will jointly need to evaluate which listed derivatives will be suitable alternatives to OTC derivatives over time. For a real shift towards more listed derivatives to happen, there would need to be a concerted willingness and effort in the chain of brokers, buy-side technology firms and venues. The poll at the ATF cross derivatives debate revealed on a weighted average that the buy-side participants were trading about 64% listed derivatives. While every buy-side participant present traded for hedging purposes, there were also many who were trading to take positions for funds while 29% were engaged in systematic trading.
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Anita Karppi | Managing Director
Telephone: +44(0)203 411 3996
Read the article in The Buy-side Perspectives: https://joom.ag/NN6a/p14