The European Commission recommendations for a Capital Markets Union (CMU) is a credit positive for the region’s asset managers who have been unable to match the scale and profitability of their US peers partly due to the fragmented nature of Europe’s capital markets, according to analysis from Moody’s Investor Services.
Last week the Commission issued 17 recommendations from the so-called High Level Forum (HLF) in a report entitled “A New Vision of Europe’s Capital Markets Union”. Although there is no guarantee that their proposals will be implemented in their current form, the Commission is urging “rapid and bold measures” to be adopted to stop Europe falling behind as it emerges from the economic crisis triggered by Covid-19.
Moody’s notes those that would help boost the fortunes of the asset management community include overhauling existing EU financial regulation such as MiFID II, which have been criticised by financial groups for their unintended consequences. Others on the list are increased cross border investments, greater pension reforms, improved advisory services and products, and better financial education for private investors.
In general, the financial services industry is seen benefitting from a consolidated tape which has been a source of contention. While the HLF acknowledges the disagreements on the feasibility or design of the tape, it agrees that a consolidated tape would require comprehensive coverage, improved quality and standardisation of data in order to aggregate data in a meaningful manner.
Establishing a single capital market in the EU started in 2015 but has had limited progress. However, the Covid-19 pandemic could be a turning point.
Moody’s research points out that although Europe and the US have similar sized economies, the latter has much broader, deeper and more liquid capital markets. This has, it says, held back European asset managers’ investment in new products and technology and hindered their profitability.
The compound annual growth rate of assets under management for US asset managers was 5.1% between 2009 and 2019 compared to the 3.9% for their European peers, according to Moody’s.
Swiss exchange operator SIX Group has completed the €2.8 bn takeover of Spanish stock exchange Bolsas y Mercados Españoles (BME), catapulting it to Europe’s third largest stock exchange operator and the 10th biggest globally by revenues.
The acquisition of one of Europe’s last standalone stock exchanges comes at a time when the industry is under pressure from lower fees and falling revenues. Although market volatility in March triggered by Covid 19 and ensuing lockdown saw trading volumes spike, it is seen as a temporary reprieve.
Jos Dijsselhof, CEO, SIX
Jos Dijsselhof, CEO of SIX said that BME would give SIX an opportunity to look at further expanding its business to more customers in the European Union. “SIX is committed to preserving and strengthening BME’s position in Spain,” he added. “The combined group will create innovation hubs in Spain and attract new pools of capital to the Spanish market. We look forward to fulfilling the various commitments we have made to the Spanish authorities ahead of the integration process, which we aim to begin as soon as possible.”
For now, SIX does not have any plans to delist BME as the acceptance level for the bid did not surpass a 95% threshold.
SIX’s all-cash takeover bid was accepted by owners of 77,899,990 BME shares, representing a 93.16% of the Spanish company’s capital, according to Spain’s CNMV market regulator.
Javier Hernani Burzako, CEO, BME
Javier Hernani Burzako, CEO of BME, said: ” Together we have a stronger business model that will enable us to continuously improve our products and services offering as well as significantly grow our client reach. The combined group will now be able to better address the growing needs of the Spanish market and at the same time expand its global footprint. BME will continue to respond to the needs of its clients and its market, as part of a stronger group that is eager to invest and innovate.”
Earlier in the year, Paris-based Euronext, which had already bought Dublin and Oslo exchanges, was considering an offer but never formally submitted a proposal. In March it put out a statement saying that the financial terms of a potential competing bid “would not be compatible with value creation and adequate return on invested capital for Euronext shareholders,” despite potential synergies.
Although non-default losses (NDLs) are rare events at central counterparties (CCPs), there needs to be a framework in place to mitigate any risks and reduce ambiguity just in case there is an occurrence, according to guidelines published by the World Federation of Exchanges.
As Nandini Sukumar, Chief Executive Officer of the WFE, put it, “Non-default losses may not be the main risk faced by CCPs, but it is still important to have a structured approach to dealing with them. That way, CCPs can devote more time to their day job, ensuring that uncertainty over counterparty credit exposures does not threaten the integrity of the financial system. This is why the WFE has taken the initiative to highlight the responsible, constructive practices employed by clearing houses in relation to potential incidents and their financial consequences if any.”
NDLs are losses incurred from operational, custody and investment risks, and are unrelated to a clearing member default, which is managed through the provisions of the ‘default waterfall. The WFE says that they would not necessarily lead to a loss, given the operational resilience of CCPs and their risk mitigation practices. For example, none of the top 10 CCPs has in practice ever allocated NDLs to users.
The paper notes that while the exact policy for NDLs is a matter for each individual CCP, operational resilience of their market infrastructures as well as robust enterprise risk management practices should continue to remain important planks of a CCP’s framework for mitigating the risk of NDLs occurring in the first place.
Ongoing focus should also be on information technology and cyber security, where vulnerability assessments, enhanced software testing, comprehensive monitoring, and benchmarking and board-reporting are best practices.
NDLs have continued to be a hot topic of debate and discussion in the industry. The challenges were highlighted in a speech by Fabio Panetta, Member of the Executive Board of the ECB, at the Second Joint Bundesbank/ECB/Federal Reserve Bank of Chicago Conference on CCP Risk Management in February.
Panetta called for more action to be taken to conceptualise NDL scenarios, reliable tools for absorbing the associated losses, and the roles and responsibilities of the various stakeholders. “There are far fewer prefunded resources available for non-default losses than for default losses, so the risk of entering into CCP recovery or resolution for non-default related reasons may be higher than for default-related reasons. It is therefore critical to make progress in this area,” he said.
Dan Barnes and Terry Flanagan discuss buy-side perspectives in the latest issue of Global Trading: trading from home, broker relationships, and ‘future-proofing’ the trading desk
Shanny Basar talks to Linda Middleditch, chief product officer at Itiviti, about the changes she has made and her strategic vision going forward.
A careers quiz at school advised Linda Middleditch to become an accountant or a refuse collector but she followed a different path and is now chief product officer at Itiviti, a technology provider to the capital markets industry.
Middleditch joined Itiviti last year from Bloomberg, where she had been global head of Sell-Side Execution and Order Management Solutions (SSEOMS product management. Previously she had senior product development positions in banks including Citi and Morgan Stanley. Her responsibilities at Itiviti include defining the product department’s vision and overseeing every element of the product strategy and execution, including design, development and marketing. )
Since joining Itiviti last year Middleditch has restructured and rebuilt the product team. She said: “I inherited a strong team with deep vendor experience and we have added market expertise in areas such as Delta One, market structure and derivatives so we have the combination of these two strengths.”
Middleditch was also hired to execute Itiviti’s strategy of providing a migration path to the firm’s multi-asset order management system for clients using Bloomberg’s SSEOMS, which will be discontinued in April next year.
“We have had phenomenal demand for the migration from Bloomberg SSEOMS but also from Fidessa clients and Tier 1 firms moving away from in-house platforms,” she said. “Banks are questioning their technology strategy and looking for outsourcing opportunities to differentiate themselves.”
Itiviti sees a continued growth opportunity for its cross-asset trading and automation platform and is working on projects for foreign exchange and fixed income, as well as meeting the increase in institutional demand for digital assets.
“We see this space growing over the next few years and we want to be at the forefront of providing technology solutions to help our clients interact with digital assets,” added Middleditch.
She continued that Itiviti’s core strengths are innovation and automation in trading technology and a key part of the firm’s strategy is to continue to identify and grow strategic partnerships. Itiviti hired Bobby Rahman as the new head of strategic partnerships last year and Middleditch said the firm is making strong headway in attracting innovative fintech partners.
“The partnership with NYFIX Matching is a really good example of the strength of our partnerships as it is a high growth business providing a great alternative to Omgeo for trade matching,” she added. “Through our long-term partnership with Alpha Omega we bring together a combined deep knowledge for cross asset trade matching solutions.”
In 2018 Itiviti merged with Ullink, a provider of multi-asset trading technology and infrastructure for financial services which included NYFIX, a trading community based on FIX , the messaging standard for the financial industry.
The need to continue to automate workflows has been highlighted by the Covid-19 pandemic forcing staff to work from home.
“Remote working has raised issues including how to meet surveillance requirements imposed by regulators for trading activities,” said Middleditch. “The importance of screen real estate has also been highlighted and the next challenge for trading platforms will be how to present their data in a more efficient manner more suited to less screen space.”
Early career
After graduating from university, Middleditch joined the graduate program at UBS where she rotated through a number of roles.
“This was a phenomenal grounding for my career as I had experience in many asset classes and saw things from all perspectives,” she added.
Middleditch joined Bloomberg in 2015 after working for several banks as she could see that banks would increasingly need to outsource their technology. “In addition, I could see from vendor pitches that they lacked market expertise which I felt I could add,” she said.
Middleditch said she did not see gender bias early in her career, but noticed that she was often the only woman in the room as she became more senior.
“I do remember a bias on my return to work after a career break to look after the children where one firm described my break as ‘time on the beach’ and offered a reduction in my salary level,” she added. “Needless to say I didn’t take the job.”
She said that returners can have a lack of confidence but a career break can teach many skills and the industry needs more women.
“I have noticed that women are less willing to back themselves,” Middleditch added. “I have been lucky to have good mentors who pushed me out of my comfort zone and into applying for roles. In addition, women have not always helped each other as much as they should.”
Increasing diversity
Middleditch continued that diversity at work also needs to include cognitive diversity.
“Teams benefit when members think differently,” she said. “This can lead to conflict due to different styles but it is healthy conflict that should lead to a well-rounded solution.”
In order to attract more women into fintech, Middleditch believes girls need to captured much earlier so that the industry looks interesting.
“I have two daughters and the eldest had computer science homework that is really uninspiring,” she said. More should be done to make technology more interesting and provide role models to girls in school.
Her advice to women entering finance or technology is that they should believe in themselves and force themselves out of their comfort zone. Middleditch said: “Women have a tendency to be conservative even though they are more than capable and so don’t always put themselves forward for opportunities.”
OneMarketData, a software solutions provider, has launched its European Composite Trade and Quote (ECTQ) database to provide support for different elements of Transaction Cost Analysis (TCA).
The ECTQ service aims to eliminate firms having to construct their own tick database from raw data files, saving time, resources and expense. It aggregates 33 market sources, including exchanges, MTFs and dark pools as well as covers over 18,000 entities which trade across more than one venue.
Subscribers, which can access the service using OneTick and OneTickCloud on either a per International Securities Identification Numbering or all ISIN universe, will have access to historical data from May 1, 2018, with current days’ composite data available prior to the following days’ market open or on a T+1 basis.
The OneTick ECTQ service offers a range of functions including ISINs being mapped to historical and current symbols which trade across multiple venues, with data being provided in either the trading or base currency. It also comprises adjustment factors – composite trades can be delivered adjusted or unadjusted, for current and historical data – as well as data aggregation. It has a daily storage universe of venues in excess of 40GB, which is required to identify and compute composite data, and over 20TB to store the data for a 24- month period.
Moreover, the service covers all trades ordered by exchange matching engine timestamp using OneTick’s cloud server aggregation technology, and published timestamps are also supported from Trades and Quotes to address inconsistent timestamp granularity. Trade conditions can also be attributed to each trade and filtered to include only relevant trades, such as auction trades and off book trades.
Jeff Banker, Senior Vice President at OneMarketData, said, “Recent volatility has significantly increased market volumes and message rates, increasing the infrastructure necessary to collect and aggregate intraday tick data. ECTQ consolidates these sources and enables clients to access just the data they need, without the significant overhead associated with maintaining their own tick data infrastructure, reference data and high-performance time series database.”
(The following Q&A is a compilation of a three-part GlobalTrading podcast.)
With Luc Renard, Head of Financial Intermediaries & Digital Transformation, Asia-Pacific for BNP Paribas Securities Services, David Braga, CEO, BNP Paribas Securities Services Australia & New Zealand, and Peter Hiom, Deputy CEO of ASX
How are the needs of the securities services market changing, and how are providers evolving to meet those needs?
David Braga, BNP Paribas Securities Services
David: Some things haven’t changed. The base requirements in terms of what’s expected from a securities services provider — the core processing of trades, of cash, of corporate actions, the expectations around that being accurate, on time and with a high straight through processing rate and value for money — have stayed the same.
Technology has evolved, and the use of technology is driving us onto alternative platforms. For example, last year BNP Paribas was accredited as the first global custodian depository participant to join the New Zealand Exchange [Clearing] Depository since it was founded in 2010. And as technology brings new players into the market, we have to set up to interface with those participants.
We’re looking at how we can bring the sell side and the buy side together across our business. As a provider, we have to continually adapt to the environment. In Australia and New Zealand, to be competitive you need global scale, and you need to bring that global scale into the market and make it effective on a local basis.
Luc: We are in a very competitive industry, one that is driven by a sustainable capacity to invest in technology. Our clients are looking for yield — they are looking for automation, they are looking for real-time data and information. Our capacity to invest [in technology] helps them achieve their own goals.
What is the future of securities services?
David: The disruption we have seen from the pandemic presses fast forward on the cracks that were already there. So providers with strategic vulnerability — a lack of scale, a poor value proposition or older technology — are likely to be exposed.
A lot of our future will be driven by the quality of our people. The value that you can put into play for your clients based on local-market and global expertise is incredibly important.
We’ve shown through the recent disruption that all of our normal business activity can continue to be delivered. But the real pressing question is, what about change and innovation? It’s one thing to work from home and keep all the settlement activity going, but innovation is a different type of work. So we’ve been investing in our people.
Luc Renard, BNP Paribas Securities Services
Luc: We have seen what was impossible pre-COVID, becomes possible. Out of necessity, we became even more agile, and were able to meet all our obligations without taking additional risk. As mentioned by David, this was based on the commitment of our people.
Post-COVID, our clients will have new needs and new requirements. They will be looking for new solutions, and reassessing operating models, to make sure they’re reliable, rock-solid and scalable.
What is the current role, and the future potential, of Distributed Ledger Technology (DLT) in securities services? What is BNP Paribas doing in this area?
Luc: At BNP Paribas, we are leveraging a new generation of custody platforms being rolled out across Asia-Pacific markets. The Australian stock exchange and the Hong Kong stock exchange are replacing their post-trade market infrastructure with DLT technology, and they are giving market participants the option to connect. Either you connect to ISO 20022 Swift messages, or you connect directly to the blockchain and you take a node.
Because we were already ISO 20022 compliant, we didn’t have to assess what was the best option for us. We had time to understand the potential of the DLT, to ask our clients about their needs, and to work with the stock exchanges, as well as with Digital Asset Holdings, to leverage the investments they made to benefit our clients. We see the potential of bringing a new set of structured and unstructured data to our clients, and building additional services on top of that.
In post-trade, there is a sequential workflow, which means you wait for one party to instruct you to forward the same instruction to the next party in the intermediary chain. Blockchain enables a multi-party workflow, which speeds up the workflow and the validation process.
As an example of what we are developing, we are working with Digital Asset Holdings to streamline election processes in a way that will allow our prime broker and asset manager clients, to send their elections only a few minutes before the market deadline. This will be done through smart contracts and blockchain.
How has the application of DLT been different in Australia compared with elsewhere?
David: The Australian stock exchange had a pressing and imminent business problem in the form of the legacy CHESS environment that they needed to replace.
So the way I think about that as a market participant is similar to when we moved from T+3 settlement to T+2. Most of the hard work is for the ASX, but it is still a significant shift for everyone else, in making sure that we can continue to interface into the system.
Because ASX is a first mover, people can see the difficulty and complexity, and the benefits have been the subject of much debate. But they will be one of the first organisations to prove some of the benefits from the smart contracts, and from the ability for everyone to see the same data at the same time, and integrate it into workflows.
We’ve seen high market volatility and trading volumes recently, which has put pressure on banks clearing and settling these large volumes. What has been the impact on the clearing and settlement business?
Luc: The sell-side client didn’t wait for the COVID-19 situation to happen to review and to reassess its operating model. There already were changes taking place in terms of the cost of capital, margins shrinking, and the evolution of technology. So all brokers have been looking to optimise and simplify their operating models.
The custodian and clearer doesn’t just connect the broker and the market — it also helps revamp brokers’ operating models. COVID-19 has accelerated some of the decisions for clients to outsource their back-office clearing operations to a custodian.
What business-model evolution is important for custodians?
David: There’s a change happening at the moment where you can build strong partnerships. Rather than having everything made by BNP Paribas, you can create an ecosystem of providers and fill out a comprehensive value chain for your clients. It’s a bit like being a smart phone provider — the apps may be your own or somebody else’s, but what matters is how you bring it all together for the end user.
At BNP Paribas, we have a range of different partnerships. One we signed recently is a partnership with the wealthtech platform Allfunds to develop next-generation fund distribution services — looking at the dealing, settlement, custody and administration of unlisted investments on a multi-jurisdictional basis. And in the context of custody and clearing, there’s our partnership with Digital Asset Holdings which has propelled our blockchain capabilities.
So the business model that’s evolving as a securities services provider is that you don’t do it all yourself anymore. It’s about finding best-in-class partners to co-create solutions and bring these together into an ecosystem of providers, and harmonising that on behalf of our clients. The capacity of players to provide a ‘one stop shop’ solution for clients will be absolutely key for the future success of our industry.
Peter Hiom, ASX
Peter Hiom, Deputy Chief Executive Officer of ASX, said: ASX supports the work BNP Paribas is doing to investigate the use of DAML – the same Digital Asset smart contracting language ASX is using to update CHESS – for solutions that enhance the efficiency of BNP Paribas’ own role in securities services. ASX is building a DLT infrastructure, powered by this new technology, in which applications can be deployed by other parties both within and outside financial markets to drive innovation. We would welcome onto the infrastructure any application built by BNP Paribas. As other industries and asset classes have already noted publicly, DAML coupled with an open DLT infrastructure, seems the ideal fabric to stitch together both simple and highly complex workflows in a safe and secure manner.
By Scott Bradley, Head of Sales and Global Business Development, Cash Secondary Markets and Turquoise, London Stock Exchange Group
Scott Bradley, LSEG
What does the equity market response to the coronavirus pandemic tell us about trading in the 21st century? Undeniably, there was a need for both market participants and operators to react swiftly to unprecedented events. But the infrastructure has continued to operate robustly, in terms of liquidity and availability. This was thanks partly to decisive action by central banks, but also to safeguards introduced by regulators and market infrastructure providers over the past decade.
During Q1 2020, London Stock Exchange Group (LSEG), and other major market operators, experienced record volumes. This is an example of our commitment to continue to operate orderly and robust markets to a diverse global community. During this time, we have also been reminded of the enduring importance of networks – human and technological – with market participants favouring execution immediacy and certainty.
Throughout the quarter, we saw the value of offering investor choice through a wide range of trading options, allowing market participants to refine exposures and redeploy capital globally.
A closer look at activity across key markets sheds further light on Q1’s events and what they might tell us about market trends.
The flight to lit
March 2020 saw the highest ever number of trades executed on the London Stock Exchange order book. At 44.8 million, the total towers over the previous record set in June 2016 (when trading spiked after the Brexit referendum). We also saw record volume days, with 2.9 million trades executed on March 12. But on this day, the average trade size was lower, dipping below £4,000, meaning notional executed (£10.6 billion) did not challenge the £15 billion value record set on June 24, 2016.
This combination of factors can be attributed partly to the nature of demand. Much of the global activity was propelled by quant funds looking to exit positions quickly and efficiently as part of enormous waves of deleveraging, especially in the second week of March, typically via direct execution algorithms (DEA). These trades boosted the share of activity conducted in continuous lit markets, rather than auctions or off-exchange options.
Having averaged around £2 billion per day in early February, daily value traded in FTSE 100 stocks in continuous trading on the exchange’s main market rose sharply until end-March. For example, daily value traded peaked at £5.8 billion on 9 March. This ties in with pan-European trends, with average daily value nearing €58 billion on lit continuous markets in March, a substantial increase over 2019’s €28 billion daily average.
This ‘flight to lit’ can be seen in the increase in market share in UK stocks conducted on London Stock Exchange in March. This followed a two-year period in which off-exchange, bilateral trading channels gradually increased market share, notably systematic internalisers operated by banks and electronic liquidity providers.
Back to blocks
In Q1, European dark pools also saw an upsurge in activity, including the Turquoise Plato Block Discovery™ midpoint matching service. Overall, European dark pools saw an increase in average daily value traded (ADVT) with €6 billion through Q1 (€7 billion ADVT in March) as appetite for block trading increased. Recent market volatility sparked the largest volumes traded on Turquoise Plato™ since the Brexit referendum, with daily volumes twice reaching €2.1 billion. But whereas post-referendum trading saw just 3% of total orders executed via Turquoise Plato Block Discovery™, blocks accounted for more than half of our volume on both 28 February (55%) and 9 March (59%). Complementing the speed and certainty provided through the lit continuous channels at LSEG, this ability to find contra liquidity in size through conditional blocks at peak times of market volatility and stress resonated well with customers and highlighted the importance of providing choice of execution channel.
Global ecosystem
These records reflect our ability to continue to operate orderly markets. They also speak to the broader appeal of a diverse and robust trading ecosystem, where multiple types of participants contribute liquidity across well-defined market segments. Throughout Q1’s turbulence, market participants did not only use their LSEG connectivity to trade UK and European equities. Also accessible via the same tried-and-tested single point of connectivity, firms adjusted their global strategies, both by trading international companies’ GDRs and ADRs, and exchange-traded products (ETPs), offering global and thematic exposures across a range of asset classes.
Activity in the 130+ GDRs listed on our International Order Book (IOB) reached US$570 million in average daily value traded in March, doubling overall Q1 2020 activity versus Q1 2019. In total, US$12.5 billion was traded in March, the highest level since April 2015, including a record US$1 billion traded on 9 March. In parallel, trading in our 1,600-plus ETPs increased by 150%. On 28 February, ETP turnover topped £1.5 billion and March proved a record month for ETP volumes with more than £20 billion traded overall. ETPs currently account for 11% of the exchange’s daily turnover, compared with around 6% five years ago.
Adjusting to new realities
In unusual and unpredictable circumstances, the ability to trade cannot be taken for granted. Almost all market participants faced unprecedented changes in circumstances in Q1, either working remotely from home or back-up facilities. In this context, trading in a climate of heightened news flow and extreme volatility can be fraught with difficulty, notwithstanding today’s highly automated execution processes.
When confidence in price formation becomes more urgent, measures to ensure fair and orderly markets assume greater significance. In the week beginning 9 March, we saw a 20-fold increase in the use of price-monitoring extensions (PMEs), the exchange’s stock-specific mechanism for preserving orderly trading around opening and closing auctions. Rather than pausing the entire market, such as US exchange-wide circuit-breakers, price-monitoring extensions and circuit breakers during continuous trading halt trading in an individual stock if it breaches defined price movement tolerances.
[www.londonstockexchange.com/circuitbreakers]. This allows interested parties to collectively re-evaluate, establishing the most popular price via auction, leaving the wider market uninterrupted.
In extreme market conditions, ensuring orderly trading is essential. Market participants must also know that they can trade, clear and settle efficiently and securely – across multiple market segments – via their LSEG connection. They also know that our diverse ecosystem brings together capital flows from across the globe. But it can still be difficult to find the other side of the trade if liquidity providers are constrained by margin and cash flow pressures. We have always worked closely with our members and redoubled our efforts in recent months to understand their needs.
This has led to a number of practical actions, including a three-month waiver for UK equities market-maker registration fees. When retail demand has tripled, extra measures are needed to ensure two-way pricing is maintained as firms adjust to new, remote, operating environments.
Partnership and innovation
The role of the primary exchange has been under scrutiny in recent decades. But trading activity in the past quarter has reflected the value of partnership and innovation, especially in times of need. By innovating in consultation with clients in recent decades, LSEG has built a trusted, responsive and dynamic ecosystem that relies on core principles to bring diverse buyers and sellers together efficiently.
What does the equities market response to the coronavirus pandemic tell us about trading in the 21st century? Technologies may – and indeed should – change, but principles of fair and orderly markets are timeless.
With Simon Steward, Head of European Equity Trading, Capital Group
What skills/expertise/characteristics are most important for institutional buy-side traders today?
Simon Steward, Capital Group
The institutional trading desk of today needs diversity of composition and skills. I would separate these skills into two sets of technical skills; firstly, a broad interest in markets and companies, and secondly, an understanding of market microstructure, tech savviness and regulatory awareness. Beyond that, there is another set of skills that is more personal in nature, for example strong communication, ability to establish and maintain relationships, adaptability and remaining calm under pressure.
It is rare that a single trader encompasses all these skills, but your trading desk is in a strong position if your desk has them overall. I would also single out technology as an extremely important area for the trading group to be involved with. Using technology to identify inefficiencies ensures that trading desks can evolve and incorporate changing market requirements to succeed in the future.
How has the desired skill set for traders evolved over the course of your career?
Throughout my career the demands on the trader have changed drastically. The biggest changes in the trading landscape over the past 20 years have been driven by greater electronification of trading, regulatory changes, increasing fragmentation and the ability to interpret and implement data.
Traders have had to become experts in algorithms. Not only do they need to understand the algorithms, but they also need to know their usage and how they interact with the market. Now traders must navigate a more complex regulatory trading environment that can impact individual stocks or markets. Fragmentation brings challenges around the nuances of venues; a strong understanding here can be the difference between a successful trading outcome or a poor one. Traders need to understand trading data points and outcomes in today’s data focused world and take these data points for future trading decisions. This is critical for the best execution process.
What is the right blend of human and machine on a trading desk? Is there a risk of over-automating?
Establishing a balance between human and machine on a trading desk is paramount. Especially when technology plays a significant role on most trading desks. The exact balance will differ between organisations due to different investment styles and investment tools.
Automation of subsets of flow certainly appears to be the optimal strategy but I am a strong believer that it cannot replace the approach of a human with strong communication skills, who can build relationships, adapt to changing environments and remain calm under pressure. I have seen many periods of extreme volatility during my career and the common theme has always been the expertise of human traders are valued by investors. The human connection and expertise that helps explain and negotiate a difficult trade or complex backdrop to ensure a satisfactory outcome is invaluable and most noticeably valuable in times of stress.
Have the extraordinary circumstances/market of the past few months offered any lessons about a trading desk being future-proofed, i.e. prepared for any eventuality?
The last few months have clearly been unprecedented. I would divide the extraordinary circumstances over the past few months into two categories. Firstly, I would highlight the work environment itself. Ensuring you already have in place a concise, well-thought out, and detailed business continuity plan has been imperative, and in addition to this, ensuring you have well-supported infrastructure in place to make it a reality. For our trading desk to move to a fully work-from-home setup quickly, effectively and in a sustainable manner was no easy task. Without strong leadership, excellent technical support and operational resilience this would have been incredibly difficult.
Secondly, I would point to the trading approach to incredibly volatile markets. Having adaptability and experience was key here. The trading group were subject to significantly higher volumes and market challenges in the form of wider spreads, smaller touch sizes and less market depth. But, due to the experienced nature of the team at Capital Group and the combined trading experience of the desk, most of the traders had experienced market conditions like this before.
When this experience was supported by strong counterparties with either a similar experience base or a robust algorithmic platform, we were in a very strong position to navigate the challenging period. Strong communication abilities have also been the other key factor over the recent period, both internal and externally. Traders using a variety of communication tools to pass and receive accurate trading instructions internally across the organisation and externally to our counterparts was critical and a key contributing factor to our success.
How can a firm ‘future-proof’ its trading desk?
I would say there are several things you can do to ‘future proof’ the trading desk. Firstly, diversity is imperative. This can take many forms be it gender, race, generational or economic, however, establishing a diverse team will enable you to ensure you can evolve with a changing trading environment.
Secondly, everyone has a role to play in future proofing your trading desk. Every voice is important and ensuring open dialogue on topics like technology enhancements, idea generation or culture will encourage future success. Thirdly, my advice to firms would be to not fear technology or view it as a replacement for humans. Technology should be a complementary tool to aid a successful trader and facilitate further improvements.
Finally, I would say that data is key. Traders have access to vast amounts of data that both validate and challenge outcomes. By acknowledging and utilising data, traders can always continue to improve and evolve.
How is a future-proofed trading desk a competitive advantage for a buy-side firm?
The trading desk’s role within the investment process has evolved so much over my career that I can only see that continuing in the future. As data sets continue to grow and markets continue to remain structurally complex, demands on traders to implement investment strategies will only become more varied and important. By having a diverse, experienced and adaptable trading team you are positioning your organisation to be prepared for all eventualities. This also enables your investment decision makers to focus on stock selection, safe in the knowledge that optimal execution strategies are in place and in capable hands. Using technology in a complementary manner alongside your trading desk enhances efficiencies. It also means you can identify functions that are distracting for the human trader and add value elsewhere.
With Lynn Challenger, Global Head of Trading, UBS Asset Management
Lynn Challenger, UBS Asset Management
(Answers provided on May 14.)
What have you been watching?
The Last Dance, on Netflix; National Theatre plays, on YouTube; Hunters, on Amazon Prime.
What have you been reading?
I’ve been reading a lot of newspapers and reports on COVID-19 and policy responses, and Union Atlantic, by Adam Haslett, and Good Strategy/Bad Strategy, by Richard Rumelt.
What has been the family fun?
Living in Switzerland, we are surrounded by endless biking and hiking trails. So, the number one thing we do is try to get out into nature and keep moving. Monopoly, and my kids love Minecraft. Cookouts in the backyard and hanging out around the fire pit.
How has your daily schedule changed?
My work routines haven’t changed that much. My team is actually spread across the globe, so before the crisis I was already spending the majority of my time on video conference calls. I do miss the camaraderie and the culture in the Zurich office. We try to do a virtual Zurich happy hour every week. We are actually getting better at figuring out how to actually have a casual social gathering online.
I miss my commute because I ride my bike to work and that was my daily workout. But now I get to see my kids and spend a moment with my wife every morning at breakfast. And I am lucky to have a small workout area in my house so I can get my heart moving during lunch.
Best thing about lockdown?
Spending time with my family. I get to share an office with my wife, and I get to see my kids more.
Worst thing about lockdown?
I miss seeing UBS colleagues and people in the industry. I really like the people I work with and enjoy being around them.
What have you learned during lockdown?
I have learned that we can accomplish a lot in a short period of time when we have to. A large company like UBS has policies and procedures that need to be followed at all times. But this crisis united everyone on a common goal and the amount of teamwork and cross-unit problem-solving has been incredible.
Worked any hobbies or taken up any new ones?
Unfortunately, no. Work is a lot more demanding and riddled with new and explosive risks. If anything, I have simplified and focused.
Pants for Zoom calls — yes or no?
Ha! I definitely do not don the full office uniform when I am at home. Although, I haven’t gone for the bunker beard either.
First thing you want to do when things get back to ‘normal’?
Travel the globe, see the team and get everyone out for a celebration.
We're Enhancing Your Experience with Smart Technology
We've updated our Terms & Conditions and Privacy Policy to introduce AI tools that will personalize your content, improve our market analysis, and deliver more relevant insights.These changes take effect on Aug 25, 2025. Your data remains protected—we're simply using smart technology to serve you better. [Review Full Terms] |[Review Privacy Policy] By continuing to use our services after Aug 25, 2025, you agree to these updates.
The European Commission recommendations for a Capital Markets Union (CMU) is a credit positive for the region’s asset managers who have been unable to match the scale and profitability of their US peers partly due to the fragmented nature of Europe’s capital markets, according to analysis from Moody’s Investor Services.
