LGIM’s Head of Trading shares his view from the (living-room) floor on how this crisis was different, and what lessons we can take away for the future.
Ed, how does this crisis compare with others you’ve witnessed in your career?
I’ve been in trading roles all of my working life and I’ve certainly seen some interesting times: the global financial crisis in 2008, the Brexit vote in 2016, to name just a couple. But even having been in the industry so many years, I can honestly say I don’t think I’ve ever seen anything quite like March and April this year.
In March we really saw the most volatile period in the history of the S&P index, and it’s astonishing to be able to say that. We saw daily average moves of 5%. These are huge numbers for a blue-chip index like the S&P. Equally in fixed income markets, we also saw huge stress; the volatility we saw around market closes was extreme at times, with double-digit basis point moves – these are incredible statistics. And of course alongside that volatility we also had significant changes in liquidity conditions, particularly in bond markets.
So how did the team cope?
First, we were very adaptable: we didn’t just carry on as normal; we saw the changes in conditions very early on and we altered our execution arrangements where it made sense. For example in instruments like investment-grade bonds, we reduced our use of automated trading solutions while in other markets such as futures, we reduced our execution window for the quarterly March roll. That’s just a couple of examples of the types of actions we were taking.
Another way we were able to get through this period was to rely on the close relationships we have at LGIM between traders and portfolio managers. We always work very closely, communicating throughout the day, but during these months that relationship has become even closer. This has helped to ensure that we receive benchmark orders earlier than usual and that gives us the longest execution window possible. And if there is discretion on the timing of an order, then traders have been able to provide a good deal of input to ensure that all of the liquidity opportunities are being utilised.
Are there any particular features specific to LGIM that have made a difference?
The scale of our business has really helped us to navigate this crisis. An advantage of our scale is the ability to cross contraflows of buys and sells together. It’s a very important source of liquidity and one that we were sharply focused on during this period. To give a metric, in sterling investment-grade credit so far this year we’ve been able to cross 15% of our notional turnover, which gives us a huge advantage. One figure that highlights how well the team has coped is, as at the end of April, the global trading team had executed more than £2.3 trillion in notional turnover, which is a 33% increase year-on-year.
How has the team managed with working from home?
The global trading team moved to a remote set-up pretty seamlessly. We have 31 traders working remotely in Hong Kong, London and Chicago. In the pre-COVID world, LGIM traders were not routinely permitted to work from home, so this was a large undertaking for all of us. Ahead of lockdown, we took steps to ensure that all traders had the equipment and strength of connectivity to trade safely from home.
Another challenge was communication. Here I think we’re fortunate that messaging and video technology has developed so much in recent years. An important part of our traders’ roles is being able to communicate effectively with portfolio managers, as well as with other stakeholders.
And finally, how are you adapting the team for the future?
We’re focused on ensuring we continue to leverage our global model efficiently. The value of having traders in multiple locations has become evident this year; one of the things it gives us is access to the deepest possible pools of liquidity, so we’ll definitely be focusing on the global aspect of our business.
Secondly, it’s going to be important to push ahead with our trading technology and ensuring we’re benefiting from all the functionality that is available. I don’t think anyone would say that this crisis is going away soon and in a liquidity-starved environment, everything naturally takes longer for people to do. You want your traders focused on the activities that really add value.
Finally, the trading research team: this crisis has highlighted the importance of really good data and the ability to interpret that data, and some of the studies that our trading research team have provided have been really interesting. Crucially, what they’ve been able to do is help us to improve trading outcomes for our clients. Those are some of the aspects I’ll be focused on in the coming months.