goes in the closing auction. It’s a huge
event and on rebalance day it can be as
high as 40%. Even if you’re not focused
on the close, you need to take account
of it.”
From a Credit Suisse perspective, one area
of focus has been predictive analytics. As
Cousens points out, if the close has become
more important than the ability to predict
what liquidity will be present in the close
becomes more important. If a trader can
predict that, then the trader can figure out
what they should trade earlier in the day.
Credit Suisse has been researching this
area, and has created a quant model that
produces predictions. It looks at factors
such as volume and volatility. A new
model introduced in the last six months
has significantly improved error-rate of the
predictions the bank is making, he says.
This becomes important, because a more
accurate prediction helps the buy side to
trade during the close.
“The close is hugely important,” added
Cousens. “It has grown so much to the
point where it is a standout liquidity
event that attracts liquidity from all
types of houses. As a result, the active
managers are now looking at the close
in closer detail, because there is so much
liquidity available at that one point in
time.”
ETFs and passive style
The other major factor at work in today’s
December 2016
equity market is the shift towards passive
investing and the related growth of ETFs.
This trend owes much to the increased
correlation in the market between
different asset classes, which has been
partly driven by central bank policy since
2008. In general, the value of assets under
management in passive funds has been
increasing significantly in recent years,
with many funds switching from active
management to passive management.
According to Hilton, the main driver is
performance versus cost. In the current
environment, cost has been a problem for
the active asset manager. This is particularly
severe given that it is difficult to provide
outperformance in equities today, which
then makes it very challenging to compete
with passive products that run at a fraction
of the cost.
“A number of traditionally active
managers are looking to launch passive
funds,” he said. “Passive is increasingly
becoming a part of the active landscape
too. The question is, can the active asset
manager make better use of passive
products to diversify their business.”
Credit Suisse has been educating clients on
the impact of passive trading. In general,
the firm notes that the ETF market is seen
as a useful way to trade macro events such
as Brexit, the US election in November,
and other significant events, including the
upcoming elections in several European
states. However, it is worth noting that
www.buysideintel.com
regulation is pushing ETFs towards a similar
environment to single stocks.
“We see an increased appetite from
the buy side to interact with different
ETF providers,” said Cousens. “There’s a
potential for a big change in how ETFs
trade. In the US, ETFs are very liquid. In
Europe, it’s still largely OTC driven. We are
also investing in ETF products, which will
help bring liquidity together for the buy
side.”
Different buy side traders have differing
views on the trend towards passive
investing. At the recent K&KGC 14th Alpha
Trader Forum equities in London, one
trader highlighted as his priority how
to stop the trend. However, at the same
meeting another trader stated that his
objective is the opposite; not to stop
the trend, but how to benefit from it. So
could the trend to passive reverse at some
point, particularly given the impact of
major macro-shifts such as the election of
Donald Trump in the US and his statements
concerning deregulation of US banks?
“Passive trading and high correlation
in the market are linked,” said Hilton. “If
that link were to break down for any
reason, the market could move back
towards active trading. It was the high
correlation that made it more difficult to
generate performance in active trading.
The election results will clearly impact
the opportunities that exist. Some sectors
will do well, and others… we will see.”
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