Forefront Communications

Global Investor Group: Accessing Liquidity in Different Time Zones

Tourmaline Partners

By Rowley Aird, managing director of Europe at Tourmaline Partners

Trading across different time zones can be a logistical challenge in normal market conditions. The recent spikes in both volume and volatility, combined with the global dislocation of traders and portfolio managers, has now exacerbated these challenges. Rowley Aird, Managing Director at Tourmaline Partners, shares his thoughts on how the right outsourced/supplemental trading solution can help investment managers mitigate risk and improve their trading alpha when accessing liquidity offshore.

While recent years have seen new complexities introduced to every facet of the capital markets, trading in different time zones has become particularly complicated and fragmented as more and more venues (exchanges, crossing networks, dark pools, etc.) enter the equation. As a veteran trader of Asian equities, both on the ground in Asia itself and from Europe, I have seen first-hand a number of startling differences in how trades are executed from each region. Driven by time zone issues, these challenges also occur for those trading in or from the United States.

In an ideal world, with money being no object, every global fund would simply have a trading desk in every region to manage and even take advantage of the local complexities and smart order routing advances of each unique regional liquidity landscape. Unfortunately, this is not a viable option for most investment managers.

So what can today’s trading professionals do to ease the pain of cross-time-zone trading, and perhaps even seize opportunity from a situation that’s otherwise a daily hassle?

Accessing live markets

First, let’s take a closer look at today’s reality for a trader looking to act outside his or her own time zone.

As an example, let’s look at the daily activity of a global trading desk based in London. A buy-side trader there will typically get to work around 7am and check on their overnight orders with their brokers in Asia. This tends to be a rather hurried process since European markets are already opening up, with London to follow soon after. The trader’s Bloomberg instant messenger is flashing red and green from the multiple brokers they have on their execution list, each with ‘value add’ colour and flow, and it becomes a difficult task to concentrate on regional markets that in the main have now closed. Naturally traders will prioritise the markets where they feel they can maximise value and alpha for the fund manager – and that’s usually their local market – and so Asia in the morning can easily become an afterthought.

Now come the US brokers, flashing news and flows to their clients, and briefly all eyes are on the open of the world’s largest market, albeit from afar. The US market settles down after a 30-minute frenzy, and before we know it, European markets are closing followed closely by the UK.

It has been a frantic day – chasing liquidity, choosing the right algo for the right market microstructure and crossing up blocks with natural flow – but there is still one region trading and one about to open again in a few short hours. The buy-side trader has been at his desk since 7am; it’s now 5pm and eyes are focused on the end of day, but Asian orders still have to be distributed to London brokers for the overnight session.

Since the asset owners/managers and the trader will be asleep for 90% of the Asian countries’ activity, orders are generally placed with a defensive strategy in mind, on the whole using a VWAP benchmark. The buy-side trader sends these orders out with limited instructions other than a ‘careful discretion’ or ‘over the day’, so as not to wake up in a bad position the next morning – or in the middle of the night! –  if levels have tanked against them. After all, playing out the ‘average’ card is far more sensible and easier to explain to the fund manager the following day.

The last piece of the puzzle is now in play. The trader has left for the day and the US market is closing, with orders either in the hands of a trusted broker or operating with an algo, usually with a passive or structured strategy.

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