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Geopolitics, volatility and transformation: the top trading and intraday risk management concerns

Geopolitics, volatility and transformation: the top trading and intraday risk management concerns

At a recent webinar held by ICE and Asia Risk, experts discussed how they are dealing with unprecedented global events and the subsequent impacts on volatility

The panel

  • Xiao Xiao, Head of derivatives and regulation, Apac, ICE Data Services
  • Leo Tay, Managing director and head of FX, rates and derivatives trading, ING Bank
  • David Ng, Chief operating officer, CSOP Asset Management
Xiao Xiao, ICE Data Services
Xiao Xiao, ICE Data Services

Geopolitical and exogenous events have joined market risk as challenges that make trading and risk management difficult. But traders, data analysts and portfolio managers have no choice but to develop and employ tools and judgement to ride out the volatility. A webinar discussion jointly convened by ICE and Asia Risk, Trading and intraday risk management amid market dislocation, focused on how participants in different sectors are confronting today’s irregular challenges.

Geopolitical risks

The webinar began with a poll of its viewers, which found they were especially worried about geopolitical risks in today’s market, ranking it as their top concern ahead of market volatility, inflation and operational risks. Panellists echoed this sentiment and offered discussion and explanations on handling today’s unprecedented volatility.

Leo Tay, managing director and head of foreign exchange, rates and derivatives trading at ING Bank, remarked that he was not surprised geopolitical risk is high on everyone’s list of concerns. He further commented that it is particularly difficult to model. Time series cannot model it because it is regarded as a tail-end risk event – difficult to predict because it is subject to a human element.

It was also clear to the panel that geopolitical risk is challenging to predict because of the nuances of tail risk. David Ng, chief operating officer at CSOP Asset Management, said that, as a buy-side, exchange-traded fund issuer and passive index tracker, this kind of volatility is nothing they haven’t seen before. He commented that: “I think we are a little more cognisant of the liquidity we see in the market. Sometimes, due to extreme volatility, we might see a bit of widening of spreads or liquidity drying up.” For product development, Ng said he saw opportunities such as capturing trends and launching inflation-themed products from this macroeconomic environment.

Xiao Xiao, head of derivatives and regulation, Asia‑Pacific, at ICE Data Services, observed: “If we look at 2022, it’s definitely complicated. We have seen a convergence of previously unprecedented events. When you put them together, it’s a perfect storm with industries and individuals impacted as we speak.” She further indicated that inflation is causing high prices, driven by fuel and energy prices, and supply chain stress. Monetary policy is tightening growth prospects. This increases the amount and nature of market volatility. Yet, there is a silver lining in trading strategies and opportunities. Clients are interested in new trading datasets so they can identify opportunities and develop innovative strategies.”

Later in the webinar, when asked by viewers how geopolitical risk was impacting different products in unique ways, the panel responded by explaining how nuanced differences in intraday risk management occur more in asset classes than in products. Ng laid out the situation, saying: “Fixed income, geopolitical risk, supply chain issues, and we see supply-side inflation hitting rates being raised by the US Federal Reserve. This, obviously, will have a trickle-down effect into fixed income or rates products. But the risk we see in equities requires different risk management.” He went on to say how nuances due to geographies – such as between the US and Asia – occur in terms of liquidity pools and market structure, affecting spreads. Decoupling Asia from US and European Union economies also affects various asset classes differently.”

Tay pointed out that the FX market is more digitised and algorithm-based than others. He expanded, by saying: “When I look at FX rates and derivatives, the FX market trades a lot more on a tick basis. It’s a lot more digitised, trading is a lot more electronic, and a lot more algos drive this space. So, in terms of intraday risk management from a sales side perspective, you’ve got to make sure your algorithms work during these volatile times.” He said that, while, in theory, they follow certain rules under normal market conditions, during extreme volatility you want a pause button, human traders to step in and the ability to fill orders.

Tay added that other markets – such as rates in Asia – aren’t fully electronic, so trading is still voice-based. He said: “Different dynamics occur on rates products. If you look some Asian markets, they aren’t fully electronic yet. There’s a lot of voice trading involved and some markets that are predominantly voice traded – both on the FX and rate sides. So, depending on the products you manage, there will be differences in how to manage and measure those intraday risks.”

Xiao opined, geopolitical risk is something that wrecks everyone’s nerves, one thinks of how it affects different asset classes … and it’s also impacting how firms are viewing risk management as a tool. She provided the example of how the views of private banks on risk management interact with their clients’ concerns. Private banks see the significance of having intraday margin calculations on their clients’ portfolios, as well as other real-time risk measures.

Volatility and liquidity

Current market conditions are impacting buy-side risk-managed portfolios. The panel considered key concerns and management techniques for real-time intraday-traded risk management, advanced liquidity risk and best execution.

Ng voiced his belief that, besides volatility, liquidity risk management is the top priority for buy-side houses He said: “Volatility obviously introduces liquidity risk. From a liquidity management perspective, we have been looking at advanced liquidity management especially in the pre-trade portion. Especially in the markets where we trade in Asia, markets are not so homogeneous. Some of our products are listed in Hong Kong, which hosts both Hong Kong and China equities, and market factors are different across both onshore and offshore.”

Ng added that factors such as average volume, average days-to-trade all enter analysis. He said: “We watch for less liquid names or potential names that we may not be able to fill. And these will all contribute in terms of us as a passive house into tracking differences for our products against the index we’re tracking. So this is a risk we are very keen to avoid. And, for Asian markets, traditional parametric factors that we consider in terms of pre-trade analysis are usually insufficient when you think about some of the different market structures you have to deal with.” He cited how onshore restrictions create different liquidity profiles and that liquidity planning has become more quantitative in the pre-planning phase in these times.

Xiao also highlighted that real-time/Intraday management is an effective way to identify, assess and monitor the impact of volatilities. Speaking on best execution analytics, she voiced that it’s something ICE has seen leveraged more in trading than before. ICE’s best execution information services helps clients meet regulatory compliance to support the compliance office to closely monitor firms’ trading activities post-trade. Today, it has expanded as traders/clients assess best execution and trading effectiveness at the pre-trade stage. It offers a positive feedback loop to improve their trading setup. “

Digital transformation

Trading, in the aftermath of the Covid‑19 pandemic, is still riding a massive wave of digital transformation and huge investment in new technology – a trend the panel looked upon favourably.

Tay commented that, during the pandemic, ING Bank had leveraged technology as much as possible. He stated that intraday risk was managed through optimised techniques. These are applicable today even with current intraday volatility. Core aspects of risk management require internal and external data to optimise the tools

He expanded: “Data availability depends on the products you trade. Some of the parts that are much more commoditised, FX for example, you get very nice, clean data out of it, and you can use that for your data analytics. Especially with market dislocation, it becomes increasingly important you get the correct dataset to use in your risk management.”

Xiao stated her belief that there is more need for intraday risk management tools and data, saying: “This is a huge value-add in terms of us moving towards intraday or real-time risk management.” She was also keen to point out the massive advances in storage and transfer technology that are making data availability increasingly limitless.

Ng concurred that data availability is the future, saying: “Data availability is predicated on two things. One is obviously cost – data is the new oil of the future. The other is the infrastructure that allows us to tap into that data. The data technology we have, whether it be it on a cloud [or elsewhere], will allows us to process large amounts of data quickly. But all of these things come at a cost.” He also commented that the volatility experienced today is unprecedented and the call for timely risk management requires more time and resources for data processing.

When considering how advanced data analytics were impacting risk management and trading activities, the panel championed the ability to better respond to situations outside the norm.

Xiao stated: “Using stress-testing with different extreme scenarios, one could gain insight into how the portfolio behaves during those scenarios … The more advanced the analytics, the greater the firm’s ability to react to eventualities. For me, data analytics allows you to translate data into actionable insight.”

Ng added that data analytics is important in pre-trading analysis issues such as duration, volatility and studying data points where differences in market structures create wide differences in bid/ask spreads and liquidity is thin. He believes they need to be analysed on a platform as they affect competitive strategy.

Discussion turned to whether advanced analytics would be able to reduce the risk presented by potential future repeats of crises such as the Archegos Capital Management collapse. In response, the panel referred to how Credit Suisse had since demonstrated the importance of using advanced analytics to make better-informed counterparty decisions regarding dynamic margins, and that a robust risk framework coupled with advanced analytics would help guide decisions.

Commenting on how technology could help during times of turmoil, Xiao said: “You do need to have a good risk framework to start, and then you have the data analytics as a tool to guide you and support all of the decision-making.”

There was a mixed reaction from the panel towards another innovation: artificial intelligence (AI) adoption. Even if there was agreement that investment management and trading would be increasingly driven by machines, it was voiced that human beings should remain at the helm for the foreseeable future.

Tay said: “A lot of the geopolitical risks, the concerns that we have, are just very difficult to model. I’m not sure, but I suppose AI will be able to help us with some of those modelling issues and help us with better judgements and decision-making.”

When viewers were asked what key investments were required for real-time and intraday risk management, they said they were most concerned about data availability, analytics capabilities and risk management frameworks, in that order.

Register to watch the full panel discussion, Trading and intraday risk management amid market dislocation

The panellists were speaking in a personal capacity. The views expressed by the panel do not necessarily reflect or represent the views of their respective institutions.

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