The Last Look…
Posted by Colin Lambert. Last updated: August 3, 2021
I have often found the asset management community something of a paradox – you have people at the cutting edge of markets, often in a multi-asset class environment, but just as often the firm itself is conservative to the extent that the default position on change is to put up the barriers.
Regular readers will be pleased to hear this is not a discussion around the Fix – although there again this community continues to demonstrate its deafness to new ideas – rather it is about culture. The trigger for this was analysis in CME Group’s recent monthly EBS Report, which looked at data from surveys conducted by The Finance Hive about FX trading systems and processes.
I have spent a few days reading and re-reading the post and the headline I come up with is, as the post states, “The buy-side actively wants and needs a system which solves for the diversity of their portfolios while simplifying operational execution”, however, “consistently…asset managers have been slower than expected to switch platforms due to operational and career risk, and sometimes business barriers from OMS (Order Management System) providers and other systems, especially in the post-trade arena”.
So there is a need to change systems, but they aren’t doing it? Or is it merely that in an ideal world they would like to have a different system?
There were some unsurprising findings from the research – managers are obsessed with workflow and “better access to liquidity was noted as a prominent way to improve how the buy side trade”, but even here, it is surely up to the firm itself to do something? A notable fear in changing systems was “a lack of desire to disrupt workflow”, but surely this is something covered pretty early in due diligence? “We have this OMS, can your system slot in?” It’s not rocket science – it’s about asking the right questions.
The survey also found that the ability to integrate in-house algos was important – again a question for the first meeting with a prospective provider – and that being able to integrate a trading platform with the OMS was more important than the cost.
The survey was conducted with 168 managers, CME says, 45% of whom use just one trading platform (it is not clear whether this is one multi-dealer platform or includes single dealer venues or aggregation services), while 55% – generally larger firms, use multiple venues. While there was consensus on the main demands from managers – improved integration, execution flexibility, better algos, more useful data, deeper liquidity, providing forward points, and netting – there was less consensus, CME Group says, on desired enhancements.
Something that highlights for me not only how the buy side are finally starting to focus on their FX activities more, but also how slow they have been to act, is a statement in the CME report on transaction costs analysis (TCA). Noting that better TCA with more data granularity and pre-trade analytics was requested by these firms from their platforms, the report observes that two forms of TCA are required, one for compliance and client reporting, the other to improve execution performance at the firm. As someone who has been reporting on banks and third-party firms offering this service for almost a decade, I am surprised this is seen as a new development, but again it highlights how the blinds have been pulled down on the FX market for too long as some asset managers (and also that they probably don’t want to pay for it!).
Probably the most accurate and telling observation of the report (and the most damning of the culture in some of these firms) is how the likely changes are not being driven by the asset managers themselves, but by circumstances – namely more and more banks shifting away from the large risk warehousing model. Of course, those few banks that are still happy to quote for larger tickets from asset managers are going along nicely, but there is, inevitably, an impact from the shift of so many banks to an agency-style model which says rather than “here is my price”, it’s “here is my algo”.
If nothing else, this report provides insight into the challenges of dealing with some asset managers (and the challenges facing those firms of course), but the over-riding sense is of a market segment being dragged screaming and kicking to the modern day.
What is important, however, is that it is actually changing…finally…probably. That, to tie this into last week’s column and to fulfil my contractual obligation* to mention the Fix every week, might provide food for thought in another area where asset managers should be re-assessing how they operate.
*does not exist