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September 2, 2013

Multi-Asset Masters

By Mary Schroeder

Also in this article

  • Multi-Asset Masters
  • How Mellon Capital's Lynn Challenger effectively manages a desk trading stocks, bonds, currencies and derivatives
  • Page 3

When he arrived at MCM, the fixed income portfolio managers did their own trading, while the trading desk handled equities, futures, FX and some swaps. Over time, Challenger's group gradually took over trading of all fixed income products, consolidating it in San Francisco.

Meanwhile, four separate asset management entities have been rolled up into MCM during Challenger's tenure, with their trading also centralized in San Francisco.

On the equity side, after the Bank of New York and Mellon Financial merged in 2007, Mellon Capital Management took over the quant units of each bank.

In January 2008, Pittsburgh's Mellon Equity Associates was merged into MCM, adding $21.3 billion in equity index and active quantitative assets, according to P&I in 2006.

In February 2008, the Quantitative Equity Management Group unit of the Bank of New York was merged into MCM.

A year later, Boston's Franklin Portfolio Associates was merged into MCM, adding $32.4 billion in indexed equity assets, according to P&I in 2006.

While portfolio management is still done in Pittsburgh and Boston, equity trading was consolidated in San Francisco in the years that followed. In a major reorganization of the equity trading team late last year, Challenger shuttered MCM's three-person Pittsburgh trading desk. John Keller, originally with Mellon Equity Associates, ran that desk for a number of years. He is no longer with the firm.

MCM chose San Francisco over Pittsburgh because that's where the firm's decision makers are based.

"Given the global multi-asset nature of our firm, I believe it's very important that the traders that are dealing with real-time issues are talking in real time and sharing in real time," Challenger said. "Getting them or communicate, work as a team and share information is very difficult when people are in different physical locations."

Before last year's merger, there were three traders in Pittsburgh and seven in San Francisco. There are now nine in San Francisco. On the equities side, three traders handle a mix of programs and single stock trades. Given its index bias, MCM uses portfolio trading system FlexTrade to manage its equity orders. The firm also uses FlexTrade for FX and futures and is working with the vendor to add fixed income as well.

In dollar notional terms, the firm trades about $1.2 trillion in securities a year. Of that, $100 billion is equities, $450 billion is futures, $400 billion is foreign exchange and $150 billion is fixed income.

MCM rotates its junior traders through every asset class. As the markets have become interconnected, it's important for, for instance, a U.S. domestic equity trader to understand what's happening in European credit, for example, Challenger believes.

A really good trader understands trading across markets. "So if someone really understands fixed income, and you move them over to equities, it takes them a little while to get up to speed, but once they do, they really understand both sides of the market-electronic agency versus principal dealer," he said.

 

TECHNOLOGY MAVEN

Technology has played a critical role in Challenger's management of MCM's growth. Since coming to MCM, "it's just been constant growth, and one of my main challenges is: How do I absorb that growth without really hitting the bottom-line expense? So that's why we focus so much on technology and really empowering the trader."

See Table: Mellon Capital AUM