n Expert opinion — UBS
Matching the model to
the new market structure
Mark Goodman of UBS assesses the pace of change
as banks and their clients adjust to the changes in
market structure.
Where are banks and asset
managers in terms of
developing new business
models that address the
changes in regulation and
market structure?
their needs. Instead, they’re
finding liquidity more dispersed and more difficult to
access.
This is true even in asset
categories that have been
historically among the most
UBS got an earlier start than
liquid. In the US treasury marmost banks, and many of our
ket, for example, proprietary
clients have made good protraders account for 50% of
gress. But there’s still much
volume, according to regulawork to be done. Significant
tors’ estimates.1
regulatory initiatives continue
to play out. Many institutions
In corporate bonds and
are just beginning to adjust
municipal bonds, SIFMA has
their strategies, processes and
counted 15 alternative elecworkflow to the realities of a
tronic platforms in operation,
changed market structure and
and four others planning
risk environment. Complicating to launch.2 These platforms
the job is the uncertainty
use over 40 different trading
around economic and monprotocols. Adding to the cometary policy.
plexities are new platforms
and exchange-traded products
What’s the core challenge they in the interest-rate and credit
face?
derivatives markets, where cenThey confront a significantly
tral clearing has created a new
more diverse, complex liquid- trading and settlement model.
ity landscape in the post-credit
crisis era. Institutions can
1 Bank for International Settlements, Fixed
Income Market Liquidity, January 2016.
no longer count on a limited
2 SIFMA Electronic Bond Trading Report:
number of bilateral dealer
US Corporate and Municipal Securities,
relationships to meet 100% of
February 2016.
28 n THE TRADE n ISSUE 49 n AUTUMN 2016 n www.thetradenews.com
What are the strategic
implications for asset managers?
The strategic challenges are far
ranging – from cost structure to
risk management to governance.
Establishing and maintaining
access to these diverse pools of
liquidity has significant potential costs in terms of infrastructure, compliance support and
administrative burden. Each of
the alternative platforms has its
own rulebook, protocols and
underlying technology. Then
you have the question of which
platforms will ultimately be successful and survive.
In this environment, institutions are asking themselves fundamental questions about their
business models. How can I access
the liquidity I need to implement
my strategy? How can I have confidence that I’m receiving quality
execution of my trades? How can
I achieve those objectives at a cost
that lets me deliver competitive
investment returns to my clients
and profits to my owners?
n Expert opinion — UBS
How is this changing the role of
banks?
What pressures does the
growing electronification of the
The most successful banks going markets create?
forward will be those who simplify and streamline client access
to these diverse pools of liquidity. Certainly our approach is
to reduce the complexity so our
clients can focus on their strategy rather than have to build
and support an unwieldy, costly
operational and administrative
infrastructure.
Broadly speaking, electronic
trading is on a path to capture a
more significant share of trading
in asset categories such as credit,
where adoption rates have historically lagged. Other categories
are already at substantial levels
of electronification. So electronic trading is at the heart of the
capabilities needed to navigate
the new market structure.
Because electronic trading is
What will be the winning formula
for banks in the years ahead?
inherently more efficient than
Clearly, the winning formula for traditional voice, this trend
is changing the cost structure
banks will be one that directly
of trading operations. That
addresses clients’ strategic challenges. From the UBS perspective, puts pressure on market participants to automate their
that means delivering cost-effiworkflow, develop new skill
cient, dynamic access to a global
network that encompasses all the sets and take a look at their
organizational structure. For
pools of liquidity relevant to clients’ needs. Principal trading will that reason, clients are looking
continue to be part of the banks’ at expertise in electronic trading as a critical factor of their
capability, but a major objective
relationship with banks.
will be to bring clients opportunities to interact with the appropriate types of liquidity they need How comfortable are investors
with the electronic trading
to execute their strategies.
techniques needed to tap these
A critical part of that
alternative liquidity sources?
approach is providing quality
execution in ways that are verifi- They’re growing more so. An
able and transparent to clients.
important area of our work with
To that end, an important role
clients is advising on electronic
for the banks is the systemtrading techniques and tools
atic monitoring and analysis
– which approach may work
required to improve trading
most effectively in given market
outcomes and make the adjust- conditions or venues. Overall,
ments needed to be successful in we’re finding that clients come
changing market environments. to value the increased control
n THE TRADE n ISSUE 49 over their orders that electronic
trading brings.
It’s worth noting the emergence of the role of the electronic sales trader as a sign of the
changing approach. Rather than
owning the order, the electronic
sales trader’s role is to help the
client use the right algorithm
in the right venues to maximize
the trade’s outcome. In some
areas, such as in credit, we also
see clients more open to placing passive orders on alternative
venues as well as actively taking
liquidity.
Do you see institutions
accelerating the pace at which
they’re adjusting to the changes
in market structures?
Yes, the early adopters are benefiting from the changes they’ve
made, and that’s stimulated
others to rethink their models.
Challenges abound, but we see
an abundance of opportunities
for clients seeking to maximize
their access to liquidity options
and improve the quality of
execution. n
The views and opinions expressed in this material
are those of the author and are not those of UBS, its
subsidiaries or affiliate companies. Accordingly, UBS
does not accept any liability over the content of this
material or any claims, losses or damages arising
from the use or reliance of all or any part thereof.
n AUTUMN 2016 n www.thetradenews.com 29