By Joe Collery, Head of Trading, Comgest
As we move farther into 2021, there is much on the minds of institutional traders. From my perspective, there are three key themes currently facing traders on every trading desk: the regulatory environment, trade data analytics, and working from home.
As of February 3rd, Swiss equivalence in the UK will come into force, which once reciprocated will allow Swiss shares to recommence trading on UK venues. This will reintroduce an important level of competition that had been removed in 2019 and will ultimately benefit end investors. While it is unlikely that we will see UK/EU equivalence any time soon, this is certainly a noteworthy step. The current post-Brexit environment has impacted trading desks more from the point of view of their coverage than the liquidity in the names they trade. Due to a concerted effort from both ESMA and the FCA to minimise market disruption, there are fewer than 50 companies trading in London with an EU ISIN, which has led to a relatively seamless start to 2021 trading for both UK and European trading desks. The larger impact has been from a sales trading coverage point of view, with many European buy-side desks no longer permitted to interact with their relationship point of contact in London. This has led to the expatriation of London-based coverage to Europe in order to maintain the status quo or to forge new relationships with European-based coverage, which takes time to build trust.
2020 saw outages at major exchanges including Deutsche Börse, New Zealand, Tokyo, the Australian Stock Exchange and Euronext. This has once again highlighted the need for a consolidated European tape, which would go a long way towards providing continuous trading in the event of another outage.
Buy-side relationships with liquidity providers have never been stronger, most notably on the electronic side. We spent a lot of 2019/2020 casting our net to test the algorithmic capabilities of all available houses. This allowed us to create a refined list of preferred partners whose approach, and technical capacity, matches our own. The sheer volume of trading data makes it difficult for many buy-side firms to store and, indeed, interact with data in a meaningful manner. It requires more computing power than the traditional SQL database with VBA queries, especially as the coding language of Python gains significant traction in the industry. This is where the partnership model with liquidity providers has come into its own. Quarterly broker reviews are much more structured and focused on the data specific to orders and style of trading. It is no longer a case of summarising trading volumes and updating clients on business developments, but rather it is an interactive commentary on the performance of specific trades and the conscious tweaking of the algorithms’ behaviour to put this new knowledge into play going forward for performance enhancement. Perhaps in the future this will be entirely automated as we can already see shoots of AI in the industry in this fashion. As a result of the pandemic, the current work-from-home environment has brought this broker review into people’s living rooms which has allowed for a more honest, authentic relationship as professionals interact on a more personal, genuine level.
The issue most pertinent to traders’ day-to-day lives going forward is working from home and the form that this will take. Whether a hybrid approach entailing a few days in the office and a few from home, or a longer-term approach away from the office, there will certainly be new hurdles to surmount. We predict a FOMO (fear of missing out) effect could be experienced by the staff at home — perhaps worried about missing key conversations undertaken at the office. Could there be a segregation between an A and a B team in the eyes of management based on whether they are in the office? Either way, it is certain that IT infrastructure will be in the spotlight for 2021 as VPNs are being utilised as a longer-term solution. Staff training will continue in line with a greater appreciation for an employee’s personal working environment, whether that be combating a sense of isolation or a chaotic management of work plus home schooling. Enhanced team relationships will be based on trust, education and empathy. The key tenet going forward as a longer-term solution will be to maximise the positives from this experience, for example the geographical boundaries that have been broken down when trading for a global desk. The world has become even smaller as global firms interact seamlessly with all jurisdictions in a real-time fashion.
It is always darkest before the dawn, but as many countries are experiencing yet more lockdowns in these dull winter months, it is imperative to use this time to focus on the positives that can be realised going forward from this global pandemic. •
This material is for information purposes only. The views expressed in this document are valid at the time of publication only, do not constitute independent investment research and should not be interpreted as investment advice. All opinions and estimates are current opinions only and are subject to change.
Comgest Asset Management International Limited is an investment firm regulated by the Central Bank of Ireland and registered as an Investment Adviser with the U.S. Securities Exchange Commission. Its registered office is at 46 St. Stephen’s Green, Dublin 2, Ireland.
Key Trading Themes of 2021 first appeared in the Q1 2021 issue of GlobalTrading.