Chris Jenkins journal

JUNE 2020 ISSUE

Introduction

Spring came late this year, but signs of life are re-emerging across the globe. Japan’s lockdown is over, so is New Zealand’s. Premier League football matches have now begun in the UK. Here in Jersey we are soon to resume into and out of the island, re-establishing our links to the outside world. I hope in time to resume my busy travel schedule to see my colleagues and clients around the world.

As we head decisively into a period of recovery, I’ve been thinking about the changes we are going to see on the trading desk and beyond as we head into a new phase of this evolving situation.

The main story: Trading through it

As we move past the peak of coronavirus deaths in almost every major economy, the focus for traders turns towards how they will operate in the ‘new normal’.

Some organizations are getting back to work. Goldman Sachs is ‘phasing in’ returning their employees in Hong Kong, Israel and Singapore. Select traders are trickling into coronavirus hotspots such as London and New York.  That said, there’s no plans to go above half capacity in the near-future. The ‘new normal’ will inevitably mean less crowded work spaces and that full teams may not be able to assemble, whether they work in large trading floors or just smaller offices. Even firms with just three or four people will be impacted by regulations on using lifts, public spaces and the phrase of the year so far: “social distancing’.

Hedge fund and portfolio managers are now looking more granularly at some of the effects of this change, and how operations can be modified or adjusted to minimize the approach. Here are three considerations.

Desk chatter

Trading desks, no matter the size, are bustling. Market observations, news stories, observations and anecdotes are passed from person to person throughout the organization. The ‘squawk box’ allows for one person to access the speaker phones of the whole desk.

With the trading desk potentially dispersed for the long-term, organizations need to capture that discussion remotely. The trickiest part here is the quest to essentially organize spontaneity and allow for the conversation that can lead to alpha generation. Text messages and video chats are compliant ways to do this, but we might see firms develop and use technology around ‘‘natural language processing’ and to capture trading chatter and turn it into actionable intelligence. There may be privacy concerns, but work in other industries is seeking to mitigate these.

Regulatory concerns

Trade surveillance systems have not always been able to function with remote working. Financial Conduct Authority (FSA) & European Services and Market Authority (ESMA) gave temporary permission for a return to paper trade monitoring, but those exemptions are waning. Firms will need to implement systems that can provide necessary reporting and compliance checks, no matter where their locations. Cloud-based systems are typically the most flexible – and companies with these already in place have been better positioned for this switch.

The question is can regulatory reviews and other due diligence discussions happen without meetings? As we move from a period of acute crisis towards a long term reality, there will need to be additional ways for important discussions about the operations of a fund to occur.

Building a network

Trading firms of all sizes are making hard decisions about whether to eliminate, defer or move their internship and first year programs. Even for those lucky enough to join a team, the experience will be significantly different from previous years. The opportunities for informal learning and observation will be curtailed, which could impact their performance in the quarters and years to come.

Online training and social events are emerging, but it is unclear if these will lead to the lasting and consequential relationships between fellow traders. Firms need to be ready to sponsor and provide time to forge bonds, especially if they have any upcoming recruiting needs. This may seem like an ‘optional’ or extra-curricular activity, but this form of learning is an important way of knowledge transfer that can and will have measurable impacts on the bottom line.

The industry has proven resilient, but it will take a different sort of mettle for what’s ahead. I have no doubt the smart firms out there will seize this challenge to build better companies.

In the news

  • A consultation released by the London Stock Exchange found a majority of traders surveyed wanted the exchange open for shorter hours. The exchange now awaits the results of similar studies elsewhere in Europe before making any coordinated action to shorten hours. The shorter hours, combined with remote trading, have the potential to widen the pool of traders, including women and people of color turned off by the current schedule.
  • One employment expert is predicting a ‘seniorization’ of the trading desk as more experienced roles dominate. “Headcount isn’t going to increase because there is caution on overall costs, but the skill level that’s required has risen. Previously you may have had a VP and juniors on some trading desks. Now, banks are selectively adding more senior traders with broader experience of different market conditions,” said London based recruiter Russell Clarke. Some junior roles could be moved to outsourced traders in order to reduce the total number of people.
  • Meanwhile in Europe, the Britain-less financial regulators in the European Union are planning a set of measures that could relax bans on paying for investment research with soft dollars. A cornerstone of the MiFID II regulation, Bloomberg predicts changes by the end of the year. While this could halt a decline in investment research, systematic changes may prevent a large return to commission spending.
  • Financial firms in Hong Kong nervously watched a confrontation between Britain, the United States and People’s Republic of China over security laws. The Economist pegs economic activity in the special administrative region at $10 trillion, including thousands of asset managers and investment banks. If uncertainty accelerates, regional rival Singapore or Asian capitals Taipei and Tokyo might be an increasingly popular incorporation destination.