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Cross-Asset Trading

In this installment of the TrendSpotters Thought Leadership Series, we consider the evolution of cross-asset trading, how the industry is changing, and the drivers behind these changes. Joining me are Harry Gozlan, CEO and Founder of smartTrade Technologies, and Greg Wood, Futures Business Development Manager at Credit Suisse’s Advanced Execution Services.

Because of the complexity of this topic, we've segmented this episode into two parts. This post contains part 1.

My interview with Harry and Greg was fascinating. They stand at the forefront of this cross-asset trend, and the shared a lot of interesting insights with me. I invite you listen in by clicking below:

Podcast (Part 1): Download (16.1MB)

Click here to read a transcript of the conversation.

Podcast (Part 2): Download (24.5MB)

Click here to read a transcript of the conversation.

Emerging Trends in Cross-Asset Trading

Harry Gozlan / Greg WoodThe institutional investment industry not only wants, but needs, to do more with less. Bank consolidation continues worldwide, while the emphasis on holistic enterprise risk management increases challenges for dealing banks and their clients in a post-Dodd-Frank world.  These forces have combined to force the industry to simplify products to improve transparency. The process of simplification has spurred growth in cross-asset trading as asset managers look for alternative alpha.

In the interview, Harry Gozlan points out that buyside demand, particularly from hedge funds have driven the evolution of cross-asset trading. Hedge funds asked for a “single access point to multiple assets to do cross-asset trades, either through auto-hedged securities…,cash against futures, basis trades,” or other combinations. Gozlan points out that traditionally, banks have maintained “siloed FX, equities and rates systems… [assembling] a single entry point to all these assets to provide a kind of cross-asset service to clients.”

As Greg Wood comments in the interview, “People are taking natural steps of looking for alternative alpha. They may be trading domestic equities first. Then they look into cross-border trading. They use derivatives as a hedge… or as an alternative source of alpha. This introduces multi-asset capacity to their trading, where they want to be able to trade each of these asset classes in a similar manner, and then ultimately, manage, risk manage, [and] position-manage those asset classes.”

Cross-asset trading, much of it over-the-counter (OTC), can involve any number of instruments, from conventional equities and fixed income products with FX components, to interest rates and futures,  also often involving foreign exchange as well as options for hedging.  But while the siloed approach can work in the short term, growing volume in cross-asset execution requires the technological capabilities to exploit and actively manage an institutional client’s overall book of business with the trading partner.  This requires a standardized approach to pricing, routing and execution, and ideally should enable clients to use similar execution algorithms across a variety of trading instruments.

Client demand is not uniform and not static.  Whereas large institutional traders or hedge funds may need to execute and measure several components in multiple series of trades, other clients require reliable execution and reporting predominantly for trading in one instrument.  Servicing both kinds of client order flow – and any number in between demands a simply designed yet flexible system that standardizes the trading workflow.

Risk management and best execution mandates are also placing demands on sell-side firms to provide more execution transparency. This demand will only grow in the future, requiring firms to standardize their approach to market data aggregation, internalization, and smart routing while also consolidating and harmonizing their approach to risk management across instrument types.

We invite you to read smartTrade’s informative whitepaper on the evolving landscape of multi-asset trading:

Meeting Multi-Asset Trading Challenges: Workable Approaches for Success in a Dynamic Capital Markets Arena

This whitepaper goes into detail about the components needed to build a global multi-asset trading platform.

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