Operational risks of home trading are being addressed, but human costs might be harder to quantify.
Trading from home – in your PJs, with no commute – is some traders’ idea of heaven. But it’s not all sweetness and light for the desk heads facing the op risk curve balls pitched up by the enforced adoption of remote working by US equity traders over the past six months. Culture, compliance, communication and connectivity are among the issues tackled this year by Lynn Challenger, Global Head of Trading and Order Generation at UBS Asset Management, and his peers. In the short term, most key risks appear to be largely under control, but longer-term uncertainties remain.
Charged with overseeing a global trading operation from Zurich, Challenger had to keep pace with varying lockdown advice across different jurisdictions as the pandemic took hold. Overall, enabling home-based trading has not proved a particularly onerous technological challenge, but it did require a nod of approval from regulators before order flow could commence.
“When the pandemic hit, we already had the systems in place to handle the volume spikes. On some days, we were trading 10x our normal volume, with the trading team working from home. The systems and processes we’ve put in place over the last three-to-four years put us in a position where we could absorb the Covid-19 crisis and not miss orders,” said Challenger.
Perhaps serendipitously, UBS Asset Management was in the midst of implementing a multi-asset technology infrastructure across its trading operations in North America, Europe and Asia. Most trading technologies and processes had been recently implemented and / or reviewed, providing a high degree of automation and flexibility.
“Operating a multi-asset trading desk allows us to develop unified workflows and common nomenclatures. This means I can seamlessly put a stock trader on derivatives, or vice versa. We can shift our people around to where they’re needed most,“ says Challenger.
The green light from regulators to trade from home was accompanied by an amber warning with regard to compliance, according to Virginie O’Shea, Founder of Firebrand Research, a specialist capital markets advisory firm.
“Some regulators initially allowed some leeway as firms extended their business-as-usual compliance and monitoring capabilities across all the channels used to facilitate remote working,” she explains. Realizing they would need time to get up and running remotely, watchdogs gave them temporary latitude on complying with reporting processes and ensuring full oversight. “But with some service providers offering free introductory packages, there’s no excuse today for monitoring staff activity any less rigorously at home than in the office. The scope of these tools means firms need to give thought to what they’re monitoring and how they – and their suppliers – are using the data,” adds O’Shea.
In the era of advanced trading automation, the vast majority of front-office workflow is observable electronically, from the order coming to the order management system to the post-trade analysis. But it’s less easy to track what the trader is doing beyond the firm’s framework, for example use of personal cellphones, without the physical oversight that occurs naturally in the office environment. In this context, company culture and training become more important.
Alongside the absence of physical oversight, a number of the other practical realities of working from home gave rise to increased operational risks for traders. According to Mazy Dar, CEO of OpenFin, a provider of integrated desktop solutions to financial markets clients, these included less-than-optimal connectivity and ergonomics. Assuming you can put the required hardware and bandwidth in place, what do you do about tools that are not cloud-enabled? And how do you organize your desktop when you’re used to six screens and now have to manage with two or three? In the remote working context, a long-tolerated lack of interoperability between applications can lead to a spike in rekeying and other operational risks, says Dar, adding that the inadequacies of existing remote trading infrastructures have been exposed during the lockdown.
“This environment has accelerated the migration of a number of apps to cloud-based usage,” he observes. “And compliance folks realize they can no longer just say: ‘Cloud doesn’t work for us’.”
Trading from home may now feel second nature for some, but further adjustments will be necessary if it is to become a semi-permanent arrangement. At UBS Asset Management, Challenger says the firm will work within the recommendations of local regulators, envisaging the possibility of staggered worktimes in some locations and continued remote working in others.
“This crisis is not just about the impact on our P&L or the returns on our funds; it’s also about the safety of our people. As we review our policies, we’ll need to look at the traders’ lives beyond the office and make sure that we follow all the necessary protocols to make them safe inside the office,” he says.
Expecting the current unusual working conditions to continue for the medium term, Challenger notes the potential constraints on teamwork and creativity. If a team is working closely together physically, for example, a trader might contribute a valuable idea to a conversation overheard between a PM and another trader. That sharing of ideas doesn’t tend to happen in a remote context, because conversations are more highly structured. One possible approach is use of persistent group video to replicate virtually the experience of sitting next to each other. But Firebrand’s O’Shea suggests more far-reaching changes may also be necessary to ensure the well-being and performance of remote staff.
“In the longer term, more thought must be given to the wider implications of remote working,” she says. “We are social animals and those that have only known office life could well suffer mental health issues without everyday face-to-face interactions with colleagues and clients. From an op risk perspective, remote learning courses can provide compliance and cyber-security training for example, but you also need to ensure those lessons bed in. This could increase the need for periodic group activities to punctuate remote working. Offsites might become onsites.”