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Multi-asset trading is sweeping Wall Street as hedge funds increasingly apply complex strategies across equities, fixed income, futures, options and foreign exchange. And, as hedge funds trade with a variety of strategies - including global macro, stock index arbitrage and convertible bond arbitrage - they are looking to consolidate market data, direct-market-access (DMA) trading and risk management through a single front end.

"Everyone is trying to get down to one screen that handles multi-assets, multi-currencies, multi-functions," observes Eric Goldberg, CEO of Portware, whose execution management system acts as a central platform for multi-asset trading. But, while the holy grail seemingly is to sit in front of one platform to trade global equities, fixed-income futures and options, the reality is that traders who track multiple asset classes often sit in front of four, eight, even as many as 12 screens.

So, the question is: Do traditional asset managers really want a single platform?

Martin Amann, a trader at Five Mile Capital, an alternative investment firm based in Stamford, Conn., that manages approximately $1 billion in assets, sits in front of four screens. But, he says, he wants even more because there is so much information to view. "We trade futures, mortgages, treasuries and agencies, and that's not easy to keep track of on one system," says Amann, a former foreign exchange trader who began trading fixed income in the past few years. "You have to get the right screens up and you have to watch everything," he explains. Still, he acknowledges that "It can be a little overwhelming at times, especially when the market is moving."

Despite the complexity of trading multiple products simultaneously, the trend is gaining steam, fueled by hedge funds, which now total 8,000 worldwide with $1.1 trillion in assets under management. Hedge funds, which are lightly regulated investment pools, have broad latitude to use multiple asset classes in their investment strategies. Under the heading of global macro strategy, "I know a guy [who trades] everything from oil to coconut seeds to fixed income to FX," comments Amann. Also, the adoption of electronic trading across equities, futures, options, foreign exchange and fixed-income markets is making it easier to execute trades that blend different asset classes.

Even in fixed income, which is less automated than equity markets and foreign exchange, "You see a gravitational pull toward single platforms," notes Daniel Doscas, senior vice president, business strategy officer and head of equity market structure within HSBC's equity division. As hard evidence, he points to expansion of Thomson's TradeWeb from cash government bonds into the credit side with corporate bond offerings and interest rate and credit default swaps.

Multi-Asset-Class Struggle

Few dispute the growing popularity of multi-asset trading. "I think you're going to see a real burst of multi-asset trading," says Jim Northey, manager of the derivatives practice for Jordan and Jordan, a financial markets technology consultancy, who is chair of the Global Derivatives Committee for FIX Protocol Limited. "Exchanges are evolving and moving toward multi-asset classes." He notes that the New York Stock Exchange has talked about diversifying into options, fixed income and derivatives through the pending acquisition of Archipelago Holdings. "Even more-traditional buy-side firms are demanding direct market access without orders being interrupted, and it's lending itself to more cross-asset [trading]," Northey observes.

While hedge funds currently are pushing the envelope in multi-asset trading, traditional asset managers eventually could move in the same direction, say several sources in the brokerage and trading technology community. According to Portware's Goldberg, traditional asset managers want to trade like a hedge fund. "They want to be able to control their own alpha capture [known as above market returns], and they want to have more hands-on control of the P&L so they can see how everyone is performing," he says.

Traditional asset managers who are looking for opportunities to boost their rates of return - and reduce the cost of supporting multiple platforms - are developing multi-asset trading skills, according to Brian Fagen, managing director in the institutional equity division at Morgan Stanley in New York. "On both the sell side and the buy side, you're seeing traders become much more aware and, in many cases, responsible for trading other asset classes," he says. In fact, Morgan Stanley is starting to see "traditional asset managers broaden the product spectrum to where the same [equity] trader is trading futures and options, but is still further away from trading fixed income," Fagen adds.

At Vanguard, Michael Buek, principal and senior trader for a small cap index fund, says he uses stock index futures when they are cheaper than small cap stocks. "If the Russell 2000 [index futures] became relatively cheap to the stocks, we'd sell the stocks and buy the futures instead," he explains.

Because the futures trade around the clock, if Vanguard receives an unexpected cash flow for the small cap fund after 4 p.m., when U.S. equity markets close, "We can buy Russell 2000 futures at 4:05 or 4:10 p.m.," Buek explains. "If we didn't have the futures as a substitute, I'd have to wait until the next morning."

Rather than call a broker, Buek says, he mainly trades the Chicago Mercantile Exchange's E-Mini Futures electronically through a direct-market-access platform. The E-Mini Futures, he notes, have three or four times more liquidity than the larger S&P 500 index futures that are still traded manually in the CME's pits.

"Five years ago, if you called the pit in Chicago, it was labor intensive, and some of your anonymity would be lost," adds Buek. Additionally, he asserts, there could be some leakage in the pit that Vanguard or its broker was buying or selling. Now, Buek notes, "I can trade really heavily all day long, and my sales person at the brokerage firm wouldn't know I did anything at all."

But Buek contends that equity futures are not a separate asset class from equities. "I wouldn't call trading traditional common stocks and trading futures that are a derivative on common stocks two separate asset classes," he says.

Center of the Trading Universe

However, one buy-side technology consultant suggests that traditional asset management firms won't engage in multi-asset trading in the same way as hedge funds. "On the traditional asset-management side, there has been an ongoing push for centralization of trading in general," says Dan Houlihan, U.S. managing director of Citisoft, a Boston-based investment management consultancy. "But we don't see a trend to have multi-asset trading to be done by a single trader. In fact, what we see is more specialization of trading functions because there is much more [regulatory] scrutiny and analysis of trading performance."

Instead of having one trader with a single screen trade multiple asset classes, Houlihan says, buy-side firms are interested in having their various traders simply use the same order management system (OMS). The goal is to centralize the delivery of trades for all asset classes through a single OMS so all positions can be run through pre- and post-trade compliance monitors. As evidence of this trend, several of the leading buy-side OMSs, such as Macgregor, Charles River and Linedata Services, have been expanding their platforms to cover multiple asset classes, including fixed income, futures and options, and interest-rate swaps.

Thomas Kim, COO at TradingScreen, which covers multi-asset classes on one trading desk, says that most traditional asset managers are coming up with innovative strategies on par with hedge funds. "If they are doing these complex transactions, they need the tools to do that in a more efficient manner," says Kim.

Still, hedge funds are the best example of multi-asset trading because they tend to have smaller staffs and maintain a presence in more asset classes, adds Morgan Stanley's Fagen. A single trader could trade single stocks, bonds, options and forex options, he says.

"Certainly, the hedge fund world lends itself to this type of trading," says Linda Bracken, managing director of YJT Solutions, a Chicago-based niche consulting firm in the financial services industry. "They have widespread latitude from their investors, and that allows them to cross asset classes in pursuit of higher returns."

From a regulatory standpoint, traditional asset managers have more restrictions on what instruments they can trade.

DMA Paves the Way

Others contend that buy-side traders will be doing more multi-asset-class transactions over time, through DMA platforms. "Now, the buy side is moving toward DMA, taking more active control on their behalf," says Jamie Benincasa, SVP at Flex Trade Systems, a Great Neck, N.Y.-based multi-asset trading system. "Therefore, they're going to have a need to do these hedges. They're consuming less and less of the brokerage community's labors and doing more themselves." For example, a buy-side index fund manager that trades international baskets with a forex component used to call a clerk in the back office who would call over to a bank to settle all the currency positions, explains Benincasa. Because that transaction might occur the next day, there's a potential to lose basis points, he notes.

However, Benincasa contends, "The ability to do the FX trading at the same time as the equity trading - therefore reducing the amount of the hedge - could result in saving more basis points, which could make the difference in overall performance. In the index game, they're playing for very razor-thin margins, and the ability to have better performance by putting these processes in place would potentially enable them to win more mandates."

Whether or not the buy side will move toward multi-asset trading on a single platform still is up for debate, but there's no doubt that hedge funds are going full steam.

However, Peter Kearns, president of Neonet Securities, questions whether the same individual, even at a hedge fund, will be trading bonds, equities, currencies and derivatives. "I don't think there's huge demand for a product that does everything on one terminal," says Kearns. But, he continues, the idea is interesting on the risk side. "You would like one system that aggregates all the positions where you can view exposure and overall firm risk" for global instrument trading, he says.

In the fixed-income world, Five Mile Capital has developed a proprietary system that is able to capture trades that are executed through brokers' sales desks or electronically via Bloomberg or TradeWeb as soon as they happen. The trades then are fed to an in-house-built position monitor, according to the firm's Amann. "We can see our risk and our positions, almost in real time," he says.

In the future, Amann predicts, cross-asset-class trading will become more sophisticated, to the point "where a lot of things will feed in after doing the trade, and it will display your risk." But, while the concept of a single desktop for multi-asset trading still is evolving, despite the real estate crunch, traders will not part with their screens, Amann suggests. "I rotate my neck a lot," he says.

Going the Extra Mile

Mention fixed income and the complexity of setting up systems to trade multiple asset classes soars. "If you're trading fixed income in vanilla securities, it's not too hard to find off-the-shelf products," says Gary Maier, CTO at Five Mile Capital, an alternative asset management firm in Stamford, Conn., that trades a broad set of fixed-income products - ranging from treasuries to un-securitized whole loans, adjustable rate mortgages, swaps, futures and over-the-counter (OTC) bond options.

Because a single desktop or application does not exist to handle the product diversity with which Five Mile Capital deals, Maier says, he developed the notion of "just-in-time integration." Maier describes a system based on a service-oriented architecture (SOA) that enables data and services to come online and integrate with themselves. The result, to users, is an enterprisewide system, called OpenTrade, that delivers front-, middle- and back-office functionality across a broad spectrum of asset classes.

Instead of building every component, the CTO opted for an architecture that is more nimble and quicker to implement for which the firm doesn't need to own every piece of technology. "We turn everything into a service," including the front end, explains Maier. "Pricing is a service, risk is a service, trade entry is a service, P&L is a service, reporting is a service, securities master is a service, account master is a service, and investor relations is a service," he says.

Traders view a virtual desktop that is able to consolidate access to the firm's OTC platforms (i.e, brokers) and electronic trading platforms (i.e., TradeWeb) on a single screen. "Depending on who they are and their preferences, they'll get a certain number of capabilities" - including a real-time P&L monitor, explains Maier. "We create a hierarchical waterfall of P&L," he continues. Individual transactions are netted into positions, typically booked into a portfolio subaccount or strategy. As each individual holding is repriced throughout the day, the impact on P&L is rolled up, first to the strategy level, then to the book level, and ultimately to the portfolio level, all in real time, Maier relates.

Multiple Providers Of Multi-Asset Platforms

To meet the growing demand for centralized trading platforms, all of the major brokerage houses are working on multi-asset systems. "You can be more cost-effective, and customers would like to deal with you through one front-end interface," explains James Leman, head of execution trading at HSBC for the Americas.

At the same time, brokers are looking to consolidate their multi-asset trading through a single FIX (Financial Information Exchange) Protocol connection. "What we're trying to do at HSBC is [build] a cross-asset-class FIX infrastructure platform," says Daniel Doscas, the firm's senior vice president, business strategy officer and head of equity market structure for the United States. "The idea is not to build separate connectivity platforms for equities, fixed income, futures, foreign exchange and derivatives all as separate asset classes, but [to build] one platform," he says.

Morgan Stanley also is focused on delivering a multi-asset-class trading presence. "We need to deliver to our clients a single front end," says Brian Fagen, managing director of Morgan Stanley's institutional equity division. The firm is developing its Passport front end in a modular function, "such that it is very fluid in both equities and fixed-income trading and options and futures," he explains.

But some hedge funds are choosing systems from firms other than brokers. William Luterman, chief investment officer of Brooks Capital Group, a family office that manages money for a Fortune 400 family, for example, uses a multi-asset, direct-market-access trading platform from Chicago-based RedSky Financial. Luterman relies on the DMA platform to trade stocks, futures and options for the internally managed portion of the family's assets. He also uses RedSky to price the portfolio in real time and hedge its positions, says Luterman, who notes that the system reaches all six U.S. options exchanges.

"We have relationships with 15 different investment banks - none of them could hold a candle" to RedSky's platform, Luterman contends. "It's the speed, the direct access, the wide variety of features in the technology platform."

Because investment banks are large, bureaucratic institutions, Luterman says, he was not convinced that they would personalize the service and electronically dump information into his prime broker after the trades were executed. But "RedSky can get that done and speak to the back office," he says.

Making Markets in Multiple Asset Classes

A forerunner of multi-asset trading is LaBranche Structured Products - a specialist and market maker in equity options, exchange-traded funds and futures - needs to hedge the risk associated with its positions. "We post bids and offers whether it be electronically or open outcry, but as we accumulate our position, we need to trade our portfolio," explains Anthony Buendia, chief operating officer at LaBranche Structured Products, LLC, a subsidiary of LaBranche & Co. Inc. For example, LaBranche Structured Products is a market maker in emerging-market ETFs (based on the Morgan Stanley Capital International emerging market index), bond ETFs, as well as the first listed China ETF and the Chicago Futures Exchange's China future (based on the CBOE's China Index).

"What I need is a platform which could handle the complexities of multi-asset trading," says Buendia, who uses Portware Professional to hedge positions. Rather than installing three separate execution programs on the desktop, which could quadruple the number of trading screens - Portware can be split to handle equities, futures and bonds with about four screens, says Buendia. The advantage of a single platform, Buendia says, is that Portware consolidates market data from as many sources as the user wants and connects to various execution venues and other services bureaus that execute orders. "It's almost a Star Trek universal translation device," says Buendia, who notes, if he didn't have Portware talking to 10 different systems, he'd have to hire 10 different FIX (Financial Information Exchange) Protocol specialists to support the messaging infrastructure necessary to talk to all the different venues.

It also needs a database to keep track of all the orders that are sent to exchanges. To automate his trading decisions, it provides a scripting language which traders can uses to program their own algorithms.