Why wait for multi-asset functionality?

Michael Levas, founder and director or trading at Florida-based Olympian Capital Management, says multi-asset trading is already well supported by brokers and vendors.

The TRADE USA: Bearing in mind the old joke that ends with the punchline, “I wouldn’t start from here”, should the buy-side trader that has committed to a particular equity trading system put his hand in his pocket again to invest in multi-asset capability?

Michael Levas: If you’re a firm of long-only managers, managing mutual funds and trading large cap growth, you’re obviously not going to buy a multi-asset trading platform, but the minute that you start trading more than two of the asset classes, you need to look at it.

You can perhaps add fixed income to the desk without making that leap, because the fixed income market is still essentially an over-the-counter market; it hasn't had the full electronic input of equities or FX. But once you get the point where you're long and short equities and you're trading two or more asset classes, I would recommend that you have a multi-asset trading platform. Just managing the workflow itself in that environment, having multiple traders and trying to call all the right people at the right time can be a very tedious. The most prudent thing obviously would be to have a platform that gives you access to those asset classes.

The TRADE USA: Let's say you've got an equities trading platform suits your needs perfectly. Can you find a multi-asset platform that will replicate the functionality that you are attached to or is it inevitable that you’ll have to give anything up?

Levas: I think you can [replicate], absolutely. There are a number of platforms out there that have been expanded so that you're not giving up anything you had previously. In fact your functionality will be enhanced because of the extra data and flexibility you receive. Obviously the firms that are creating these multi-asset trading platforms are focused on ease of use and functionality.

The TRADE USA: Where are US buy-side firms on the journey from single-asset to multi-asset trading capability?

Levas: Multi-asset trading has been around for a little less than 10 years. You've had quite a significant expansion since then with the proliferation of the hedge fund industry, macro funds and multi-asset funds.

If you're a hedge fund and you're trading more than one class, you're almost certainly using a multi-asset class trading platform. Before that, proprietary desks at some of the large investment banking firms obviously had to use multi-asset platforms as well as they'd have been in situations where they' had to hand off a trade to a colleague or something happened in one area that required a rapid reaction in an adjacent area.

The TRADE USA: Trading electronically, can you get equivalent functionality in each asset class?

Levas: Yes you can, but it all depends on the prime broker you're utilising and the type of inventory they have. In the fixed income market, for example, there would have to have a certain amount of inventory in-house to be able to sell to you or they’d need to be able to get it quickly. There might be times when you're interested in a certain bond, you put the CUSIP (Committee on Uniform Securities Identification Procedures) numbers in and your prime broker might not have it in their inventory, but a bid and ask will always come up at some point and often they would get that bond from another broker dealer that does have it in their inventory. We’re able to get that functionality through the prime brokerage firm that we use.

The TRADE USA: How are today’s systems able to handle cross-asset class trading?

Levas: Let’s take the example of cross-exchange arbitrage. This happens fairly often in the commodity markets where you can be trading a commodity on different exchanges and where there can be an arbitrage between them. Another example might be the two major gold ETFs in the US: the GLD and IAU. A few years ago, they were essentially running neck and neck, but there was an arbitrage between them, somewhere in the region of 3-5 cents. Even though they were supposed to reflect the current price of gold, that arbitrage was still there. A trader would take advantage of that. The IAU then went for a 5:1 split and brought the pricing much much lower. They did that for a number of reasons, some regulatory and some to open it up to smaller investors.

We also do commodity arbitrage across markets. Let's say we're trading Brent in London and Brent in the US. Sometimes there could be a slight arbitrage in that or you might want to be short Brent in London and long WTI in the US. A multi-asset trading platform allows you to take advantage of these situations in a way that you couldn't do before.

The TRADE USA: From your experience of Olympian, what are the headline lessons for peers that are now setting out with a multi-asset approach?

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