By Massimo Labella, European Head of Outsourced Trading, Cowen
Europe plays a special role in global markets, not only as a major developed marketplace in its own right but also as the linchpin between Asia and the Americas.
Take London. As the world’s premier international trading centre, the dealers staffing London’s trading desks are up and running well before Asia starts to wind down. These same traders also have several hours of overlap with New York and Chicago as those centres digest the day’s economic data and breaking news.
Meanwhile, as Europe’s funds have grown in leaps and bounds over the years, their exposure to Asia has continued to increase. They have always had heavy exposure to American markets due to the pre-eminence of U.S. markets and the dollar’s role as the world’s reserve currency. But as assets under management have grown, that exposure too has increased.
Latest data from the European Fund and Asset Manager Association showed assets under management more than doubled in Europe (up 113%) in the decade to end-2018, to reach 10.8 trillion euros. Some 45% of that was discretionary.
One way that institutional investors are addressing their growing trading needs is by adopting outsourced trading solutions, either as an add-on to current trading capabilities or as a complete outsourced desk. Such an idea would have been unimaginable not so long ago. But the latest study by Greenwich Associates showed that one-third of the institutions they surveyed saw outsourcing as a good solution to manage flow and achieve best execution.
For hedge funds, the needs may be even greater. Smaller funds such as those managing a few hundred million dollars in assets are not in a position to have someone staying up all night monitoring multiple markets 24 hours a day. Even firms that have 24/6 coverage may need back-up.
But it’s not just about coverage and the worry about not being able to respond properly to developments in the middle of the night.
Interconnectivity and intelligence
There are two other factors small to mid-size funds need to consider. The first is market interconnectivity and the second is market intelligence.
On the interconnectivity front, the global nature of modern markets means that a firm needs to be operating on a 24-hour clock regardless of its geographical focus. For instance, most assets around the globe have some exposure to events in the United States. A European asset manager knows their portfolio is exposed to potential volatility well after European markets have closed. The same is true for asset managers in other centres.
An outsourced trading provider is able to take a tri-directional view of the world – whether the flows are U.S.-Europe, Asia-Europe, U.S.-Asia – and it can pass a client’s book from region to region.
What’s more, the way that asset managers in one region are monitoring and reacting to events in another has changed radically.
Whereas 20 years ago it may have been satisfactory for an asset manager to keep an eye on the Nikkei 225, now they will be focused on what the CSI 300 in Shanghai is doing, or Hong Kong or Taiwan. An outsourcing trading provider with traders stationed around the world is in a position to keep clients up-to-date on a minute-by-minute basis.
That leads to the second factor: market intelligence.
Any buy-side firm of any size or variety will tell you that there is no substitute for having eyes and ears where they are needed. Local intelligence comes in multiple forms, including the contacts that someone has as well as the institutional memory from having spent a decade or two in a given location.
The rising importance of China in global markets illustrates this perfectly. A European asset manager can hardly expect its traders to have a feel for how China’s moves matter – or will matter – to markets in Singapore, Bangkok, Kuala Lumpur or Jakarta. But traders operating in Asia are living and breathing this reality every day.
Local intelligence shows up in other ways too. As the composition of equity indexes changes over time, particularly with tech companies increasingly dominating certain indices, traders in one centre or another develop a feel for their markets and can factor that in. A multiple on a given share may make little sense to someone based 5,000 miles away. But it may be perfectly logical to experienced eyes.
Boots on the ground
At Cowen, we’ve noticed that our clients increasingly are not focused on one region but on all three.
A TMT manager may zero in on the U.S. and Asia, with some attention reserved for Europe. A healthcare manager previously may have been looking mostly at the U.S. and Europe but now needs to think about China because there is so much biopharma activity there.
Traders are functioning in markets around the globe, but the cost to establish a local presence and local expertise is prohibitive for all but the largest of institutions. They need boots on the ground. That’s exactly what an outsourced trading desk provider can give them.