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September 2, 2013

Multi-Asset Masters

By Mary Schroeder

When Challenger joined the firm, MCM had different trading systems for each asset class. The firm finished installing the Charles River order management system about two years ago, which can be accessed by portfolio managers in San Francisco, Pittsburgh and Boston. Next, the firm rolled out the FlexTrade execution management system for equities, futures and foreign exchange.

"Given the growth trajectory we were on, we decided it was best to really focus on putting all the orders through one order management system, standardizing everything so that traders could really move freely from asset class to asset class, so if I need help in futures trading, my equity trader can move over quickly and trade futures," he said.

Having a single trading system for multiple asset classes allows Challenger's crew to both accommodate the investment needs of clients and to better manage their own risk. For example, an investor with a futures position that has the characteristics of an equity investment might want to switch to the underlying cash equity.

"I can bring both of those trades into my system and manage the risk accordingly, Challenger explained. "You've got to be able to see the risk and act on it. With disparate systems, you really can't manage it appropriately."

While Mellon does invest in overseas securities, the majority of its fx trading is for an active currency management strategy. To support that business, the firm custom built an order management system that allows it to look at currencies on an individual basis, according to Challenger. Mellon Capital Management's managing director of global trading. "Fx is a unique product that is by its very nature two currencies being traded as a pair," Challenger explained. "EUR/USD is really EUR traded against the dollar. So what we do is break the pairs into single securities and view the risk at an aggregate level so we can combine trades into more liquid pairs." MCM connects to all of the single-dealer platforms in the market, streams their prices directly into an aggregator, and has created its own mini exchange.

"So we can in real time trade at the top of the book and the price ends up being 10 times tighter than it would be if we went direct," Challenger said.

Technology has also helped Challenger keep down his head count, which stands unchanged since 2008. "We've really been able to take on this growth through productivity enhancements, putting everyone on the same desk and keeping them together," he said.

Challenger added: "We really are focusing on getting all the information a trader needs on a blotter in front of him, so he can focus on markets and trading. And then when trading is slow, we try and encourage them to integrate and communicate with portfolio managers and research, et cetera.

"One of the things we really want our traders to do is to trade," said Challenger. "So where we can, we are trying to eliminate having them follow up on trade breaks or have them do anything manually, or any administrative work or fill out forms. We really are focusing on getting all the information a trader needs on a blotter in front of him, so he can focus on markets and trading."



At least one observer believes Challenger is "a fearless visionary." Challenger has "the ability to envision, articulate and execute change," said Jamie Benincasa, senior vice president at FlexTrade.

"From a multi-asset perspective, Mellon Capital Management is implementing very forward-thinking work-flow procedures that benefit not only traders' productivity but also their performance," Benincasa said.

For instance, "the way the firm deals with its FX exposure, handles futures trading and implements large global rebalances all have placed significant focus on the traders themselves, rather than outsourcing a lot of that to other counterparties," Benincasa said. The trader has the whole picture and knows what the objective is from the portfolio manager to compliance, he said.

Challenger gets the final word. "Our philosophy is that we own our trading," he said. "Our traders control every aspect of their orders, ensuring the execution is in line with their objectives."


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