By Rowley Aird, managing director of Europe at Tourmaline Partners
Trading across different time zones can be a logistical challenge in normal market conditions. The recent spikes in both volume and volatility, combined with the global dislocation of traders and portfolio managers, has now exacerbated these challenges. Rowley Aird, Managing Director at Tourmaline Partners, shares his thoughts on how the right outsourced/supplemental trading solution can help investment managers mitigate risk and improve their trading alpha when accessing liquidity offshore.
While recent years have seen new complexities introduced to every facet of the capital markets, trading in different time zones has become particularly complicated and fragmented as more and more venues (exchanges, crossing networks, dark pools, etc.) enter the equation. As a veteran trader of Asian equities, both on the ground in Asia itself and from Europe, I have seen first-hand a number of startling differences in how trades are executed from each region. Driven by time zone issues, these challenges also occur for those trading in or from the United States.
In an ideal world, with money being no object, every global fund would simply have a trading desk in every region to manage and even take advantage of the local complexities and smart order routing advances of each unique regional liquidity landscape. Unfortunately, this is not a viable option for most investment managers.
So what can today’s trading professionals do to ease the pain of cross-time-zone trading, and perhaps even seize opportunity from a situation that’s otherwise a daily hassle?
Accessing live markets
First, let’s take a closer look at today’s reality for a trader looking to act outside his or her own time zone.
As an example, let’s look at the daily activity of a global trading desk based in London. A buy-side trader there will typically get to work around 7am and check on their overnight orders with their brokers in Asia. This tends to be a rather hurried process since European markets are already opening up, with London to follow soon after. The trader’s Bloomberg instant messenger is flashing red and green from the multiple brokers they have on their execution list, each with ‘value add’ colour and flow, and it becomes a difficult task to concentrate on regional markets that in the main have now closed. Naturally traders will prioritise the markets where they feel they can maximise value and alpha for the fund manager – and that’s usually their local market - and so Asia in the morning can easily become an afterthought.
Now come the US brokers, flashing news and flows to their clients, and briefly all eyes are on the open of the world’s largest market, albeit from afar. The US market settles down after a 30-minute frenzy, and before we know it, European markets are closing followed closely by the UK.
It has been a frantic day - chasing liquidity, choosing the right algo for the right market microstructure and crossing up blocks with natural flow - but there is still one region trading and one about to open again in a few short hours. The buy-side trader has been at his desk since 7am; it’s now 5pm and eyes are focused on the end of day, but Asian orders still have to be distributed to London brokers for the overnight session.
Since the asset owners/managers and the trader will be asleep for 90% of the Asian countries’ activity, orders are generally placed with a defensive strategy in mind, on the whole using a VWAP benchmark. The buy-side trader sends these orders out with limited instructions other than a ‘careful discretion’ or ‘over the day’, so as not to wake up in a bad position the next morning - or in the middle of the night! - if levels have tanked against them. After all, playing out the ‘average’ card is far more sensible and easier to explain to the fund manager the following day.
The last piece of the puzzle is now in play. The trader has left for the day and the US market is closing, with orders either in the hands of a trusted broker or operating with an algo, usually with a passive or structured strategy.
Finding a better way
If we want to maximize opportunity in other time zones, and not just manage against the downside, what can we do?
Global fund managers in Europe have traditionally made one of two choices: either leave things the way they are -- ‘if it ain’t broke, don’t fix it’ -- or follow the route only a few of the world’s largest fund managers can afford, and set up regional trading desks.
Recently, the market has seen a few large global fund managers expand their trading desks into new regions. Their transaction cost analysis (TCA) may show it is worth the extra financial investment to, for example, place two traders on a new desk looking for liquidity with local counterparties and using smart order routing techniques and advancements in desk technology. This can include artificial intelligence programmes that react to real-time tick moves on the stocks they are trading. While costly, this approach clearly has advantages over their existing defensive, passive, VWAP-based benchmarks, where they are no doubt losing an edge against competitors that have traders in different time zones trading markets during their sleep time.
However, other options beyond these two are actually available to help source liquidity.
Supplementary Trading Solutions
At Tourmaline, we’ve been excited to see the attention that outsourced trading has been receiving, but the buy side still hasn’t fully wrapped its head around what the value-add truly is, and how flexible the solutions can be. Too often, it’s believed to be an ‘all or nothing’ solution designed for small start-up funds.
In fact, most of the growth in our business now comes from ‘supplemental trading’, where funds employ us as a liquidity aggregator and as an avenue to brokers, when they do not have space or time through operations and regulatory oversight, to set up the relationships themselves.
More and more investment managers are learning that there is a solution for global trading desks that are trading in different regions. For instance, funds can very easily outsource their Asian or US books from Europe and enjoy the benefits of having a local trading desk that can access and react to real-time liquidity situations.
The key is to enable the best relationship between the global fund manager in Europe and the outsourced local trading desk, whether they may be in the Americas or APAC. Once a portfolio manager’s goal is understood, the local trader can react to the market in a way the PM’s own desk cannot and can be the ears and eyes on the ground (And if the PM is in the region, while the trading desk is back in Europe, then it’s a no-brainer to have tools at his or her disposal to react to local events).
An Opportunity Not to be Missed
Certainly, this requires trust – between the PM and the outsourced trading desk – but as active fund management comes under more and more pressure, with lower fees and performance judged against index trackers, liquidity-seeking, alpha-generating local traders are a tool that cannot be simply ignored.
When it comes to trading across time zones, institutional investors are increasingly recognising what’s at stake, comparing the inefficiencies of their status quo trading strategy against the opportunities of accessing products that are now available through a supplemental trading strategy. By employing the expertise and regional resources of a global outsourced trading provider, investors are finally finding a way that time can truly be on their side.
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