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Episode 41

The future of trading? 

Published on: August 12, 2020 • Duration: 18 minutes

This week Louisa is joined by a number of market luminaries including Refinitiv’s Head of Elektron Real Time, Douglas Munn, Head of Buy Side Trading, Quentin Limouzi, and finally Crosslink Capital’s Head of Trading, Paul Sabo. Together they discuss how the future of trading is being disrupted.

  • Louisa Bojesen: Already before the Corona pandemic, mammoth changes have been happening across trading desks given the onset of new technologies. In this week's The Big Conversation, we look at the future of trading. Hi, everybody, I'm Louisa Bojesen, and welcome to this week's The Big Conversation. While traders have been adapting to automation and a world of A.I. for a long time, smart platforms, algorithms, quant trade mechanisms. And while traders have been forced to develop new abilities to compete, the onset of Covid19, has just served to speed up many of these ongoing shifts. To examine the changing environment of trading. Refinitiv and Greenwich Associates teamed up in a three-part series called The Future of Trading. In their first part of the report. They look at the effect of emerging technologies on ensuring market efficiency and examine where the greatest impact will come from. I spoke to a number of market luminaries and started by asking how is the future of trading being disrupted? 

    Douglas Munn: Machine ready data can be used for certainly with AI can be certainly used with ML, but it's really to be able to link the data together. Whether you're looking at real time data, whether you're looking at reference data, whether you're looking at end of day or tick history data, whether you're looking at any other types of content that is being created or anywhere along the way. Customers need to be able to bring that data together so they can actually run their algorithms to be able. They need to discover it. And then the A.I and the ML kick in when they can actually run all the different mathematical analysis that they want to be able to run once they've been able to see where those patterns start to come together. And it is growing so much more to the. As an example, recently we put our entire time series data under the cloud, which is basically petabytes of data. And now customers, instead of running six months of analysis, are now running thirty years of analysis. And they're going back to, you know, what happened in 9/11 and looking at those correlations to what's happened with Covid. It's you know, now really the technology is allowing to give people the ideas to bring together what their ideas were, but actually to be able to executed them with the technology now. 

    Quentin Limouzi: You know, I think the big trend that we've seen ongoing, especially in the buy side and will continue to disrupt the business and in a good way is really to working from home and access to, you know, the trading tools into portfolio management tools from home. So, you know, we worked on a piece of the future of trading with Greenwich prior to the covid crisis. And, you know, we saw that the enterprise systems were moving to the cloud. That was a trend that more and more people needed to and by people, I mean, you know, people in the industry, traders and portfolio managers, needed to have access to these tools on the go, whereas it's on their mobile or tablet or PCs. And you know, where the covid 19 crisis happening and everybody switching from the trading floors to working from home in a pretty orderly fashion I have to say. I think that trend is here to stay and, you know, I don't see that going away any time now. So, you know, and that can be saved both on the buy side and sell side. Right. I mean, the buyside always had a leg up, if you will, into working from home environment versus the sell side. I don't think anybody could have seen, you know, traders from the sales side leaving the trading floor anytime soon. And what we thought was, you know, that the near future and the crisis has brought that forward. And that's something that we see staying as in any other industry. 

    Louisa Bojesen: What do you think the important element will be to make working from home sustainable? 

    Quentin Limouzi: That's a great question. I think, you know what? What is going to be key is really rather than a remote access to your tools back in the office and some slowness that can be seen when you do so is really, you know, the ability for our clients to trade, to see positions, to have the two interconnected from home. So, you know, we're in a good place at Refinitiv where, you know, our OMS, Alpha desk and our EMS are ready as well as our data monitor Eikon are all in on the cloud, right? They're all SAS space. So our clients have access to it on their desktop at home, just as they would in the office. And that will be key for their success in the future. So having access to these tools and that data from home is going to be key. And also having the inter operability between these tools is going to be key. I mean, if we learn anything from the recent. Crisis that we went through and that we're in many ways still going through, you know, is volatility going through the roof? Was that, you know, our clients, whether they are trader or portfolio managers, really need the two systems to work together. EMS. and OMS so that, you know, they can make sure that compliance and risk is taking care of when they trade and that, you know, their positions and you know their portfolios are updated real time when they trade as well. So it goes back and forth between the two. Trader can step in as a PM. PM can step in as a trader. 

    Louisa Bojesen: Do you think the day trader poses a threat to the institutional trader? 

    Paul Sabo: It's a good question. I mean, as an institutional trader, it's our job to understand the markets. Right. And in understanding the markets means we have to understand all the players that are playing in these stocks. So as an institutional trader, I need to understand the day traders and what that means for stocks. And for instance, you know, there are some stocks that have high, short interest. And I know that, you know, this has been one of the highest yielding strategies for the last couple of years is buying the heavily, most heavily shorted stocks and being short or under invested in the most heavily owned and least shorted names. This is a documented strategy that's worked really well. So, you know, I know that the day traders target that that's one of their strategies is, you know, especially on earnings. We saw BP released earnings the other day and, you know, and they were hardly good earnings and they were bad, you know, on the other end of the coin they were pretty bad, but yet the stock was up. So there is a lot of things that are occurring in the markets that are not normal trading behaviors from what we've seen for the last 20, 30 years. So do they cause, you know, pose a threat? I don't see a direct threat, but it's something that we as institutional traders need to know. We need to realize we have to factor that in into decision making. Look at the way Tesla has been trading over the last several months. It's incredible. And there's a lot of, you know, people call them games that are going on in the options market. And, you know, they're not necessarily games. I mean, although some of that does exist. But it's a lot of the day traders that can't buy Tesla because of its high stock price, but they can buy calls they can buy out of the money calls. So you have an enormous flux of traders that are using calls to be, you know, to be a proxy for owning the stock. Another thing in another just one more point is if you look at the current equity put call ratios, I mean, they're just astounding. You know, the number of calls versus puts that are being purchased. And a lot of this is the day traders playing at these names. 

    Douglas Munn: We've seen customers have to change how they're running their operations. They've had to set up their traders at home. And but more importantly, I think the bigger change is what everybody's been looking to do is the move to the cloud. And being able to leverage that technology more and more and more. So we're seeing customers quickly as they can take advantage of ubiquitous systems that are available anywhere at any time and be able to really take advantage of what the cloud gives them, which is the ability to get through processing and inexpensive storage to be able to run their analytics. 

    Louisa Bojesen: And the biggest difference that you see trading from home versus trading, for example, in the office is what? 

    Douglas Munn: Well, the irony over the last year when first Covid hit, we saw record breaking numbers, so everybody's at home. So what's the difference? It was kind of nothing. I mean, when you really look upon it that way, the markets were still moving. Everything was still being executed. Frankly, we're actually seeing even a push that we actually need more capacity to be able to do it. So where one is physically located? We've now proved. Doesn't matter. 

    Louisa Bojesen: In the second part of the report, the authors argue that it's not just the value of data that's key. You also need to identify what to do with all the data. How to best utilize it. Large market data collectors will only become more important also to traders. With 85 percent of those surveyed stating that they plan to increase spending on data management, the data takeaway in the report is clear. Everyone needs a data strategy. So are data strategies in place though? 

    Douglas Munn: I think many have their strategies in place. I think many are looking to continue to update their strategies. And so because having a where you want to be and where they are today, I think many customers are looking at all the new tools and technology that are now available. And yet they come here coming to me now to look for more data and more information and equally important, to make that data very easy to use. It's what we call sort of trade ready data, because the analysis you have to do these days is so significant to be able to back test and run those analytics through and through. 

    Louisa Bojesen: Do you think there's such a thing as a saturation point with regards to data? 

    Douglas Munn: Not yet. And I would have said yes to that three years ago, because customers had challenges with having enough C.P.U and compute power in their own data centers. Now, with cloud and the ability to get to this, get to the storage and get to the compute power it really comes down to is how much money do you want to spend running the analysis and doing that. And I think we're seeing a lot of customers making that investment every day to be able to do that. 

    Paul Sabo: The playing field is very skewed to the firms that have the most resources. You know, how we get around it and how we are able to compete in the data realm is that, you know, we use some of the third party research services and they are, you know, third party data scrapers, third party data collectors. And, you know, we're able to get that data and hopefully compete. But, yeah, the playing field is very skewed. And I feel like, you know, people are you know, some people are really struggling to compete in that realm. And other people have been playing in that realm for years now and have been part of that entire change towards more data driven, AI driven stock decisions. 

    Louisa Bojesen: In the final part of the reports, Refinitiv and Greenwich Associates conclude that it's a myth that machines will take over and that the future of trading really will be about a seamless union of humans and machines with roles and room for both according to their research. There'll be new opportunities for top quality talent as human intuition and decision making will be prevalent alongside advanced A.I. and data analytics. They also find that we'll be seeing more of a shift favoring those with backgrounds and for an example, computer science, quant data science or programing as opposed to those with finance degrees. I asked our market participants, if data is becoming so important, what are the changes in skill sets that you look for in traders? 

    Quentin Limouzi: Once again going back to that, you know, that paper that we did with Greenwich? It is very clear that engineers, computer sciences, computer programmer and data scientist are areas where the financial industry, whether on the idea generation side and the trading side, are looking to beef up. And that's true both on the buy side and the sell side. So really, the trader of tomorrow ideally will be able to understand big data and probably understand the tools to ingest that big data such as augmented intelligence, machine learning and be able to code in Python? We see these trends and it's definitely growing. 

    Paul Sabo: What I've done to remain relevant and make myself as useful as I can to the firm is step back a little bit and have a little bit bigger time horizon. So, for instance, if I'm buying or selling a stock, you know, I do a little bit more technical analysis on it. I've been doing technical analysis my whole career, but I pick a more involved in picking spots. So, for instance, if I feel like a stock, you know, we're looking to buy it, I'm going to get a better chance to buy in the next two, three days, four days. You know, I will hold off, you know, a voice this to the portfolio manager and tell him my reasons why I feel like we can we can buy it cheaper and then the next few days. So and that's where my job's morphed more into. It's looking at shorter timeframes than a week. But a lot longer timeframe than just the particular day that I get the order in trying to maximize buying or selling the stock. 

    Douglas Munn: We talked a little bit earlier about machine learning and A.I. and how those things are changing, those sort of core technologies. But it really what we're seeing that one of the biggest drivers is sort of pure analytics and getting data ready analytics to our customers so that they can make decisions better with it, with some of the new cloud technology that's come out with being able to bring the data together and make it a very useful customer. We're now in the ability to be able to publish analytics out to our customers on an ad needed basis that helps them in things, whether it be pre trade analytics, in terms of, you know, pre trade, pre trade analytics, but also in the post trade side of it. We've seen analytics being a big part of post trade. But how do we actually help them bring that together in a pre trade analysis is really becoming a major change now. We can now bring to those customers and once again help them make those better decisions. 

    Louisa Bojesen: We like to think of the future of trading as smarter trading, and one of the findings from the Refinitiv Greenwich Associates research was that by, quote, freeing up about 20 to 25 percent, the capacity from manual processing means that portfolio managers, analysts and brokers, they'll have more time to generate ideas and work with clients, end of quote. So between industry professionals, technology and clients, that might just mean a win win win for all, regardless of advances in technology and process. It's clear that, above all, data is key. 

    Roger Hirst: And you can now get the big conversations from Refinitiv as a flash update on your Alexa device or Google assistant. You want to know more about how to download it to your smart speaker. Please go to Refinitiv.com/flashbriefing.