Tony Gau: Portfolio Managers and traders each have their own goals to accomplish but their achievements are measured on different benchmarks. Although they understand the need for cooperation and agree on the merit of streamlining the investment process, they haven’t found a comfortable, yet reliable, paradigm to start working with. Some areas of concern are found in information protection, data integration, idea quantification and plan generation.

TF: Portfolio managers and traders have lots of tools to help them do their jobs better, yet these tools don’t really work together to make the overall investment process easier or more streamlined and efficient. Why is that?

TG: Most of the current integration happens within the infrastructure that connects different systems and platforms together. This is where traders and portfolio managers do most, if not all, of their work and it occurs in one single place. The workflow seems streamlined because it is interconnected. But the investment ideas do not pass through effectively along with the workflow in the information chain. Often, information is missed or becomes distorted along the way.

TF: What are some of the tools and what do they do for each player (e.g., portfolio manager, trader)?

TG: Portfolio managers, for example, have order management systems directly connected to algorithms and broker-dealers and traders have execution management systems equipped with speedy connectivity to market venues. These tools make it easier to manage a wide range of operations. Technology has facilitated the connection between these operations in the past, and it is now time to facilitate more strategic information transfer between both roles.

TF: A recent TABB Group Perspective report even suggested that sometimes, the trading strategy might not be an accurate extension of the investment strategy and in fact the two could even be at odds. Do you see that as a real possibility also?

TG: Coordination is the key. For example, successful athletes can synchronize the brain and the body and channel what they perceive into precise actions. Extraordinary body strength won’t guarantee a win on its own; it is necessary to include maneuvering and strategies into the equation.

More often than not, we have seen portfolio managers and traders work without being in synch because their strategies are not aligned properly with each other. Preferably, when portfolio managers plan an investment strategy, traders should have a matching plan to implement the idea. Before taking any action in the markets, the two should reconcile their plans and goals into one single strategy, rather than letting the back-and-forth become trial and error.

TF: Are there any metrics on the cost of this problem? Or perhaps what the opportunity cost might be? In other words, is this really a serious problem?

TG: The alpha loss and risk misalignment that can be caused by poor coordination can be tremendous, and many times it results in implicit costs to the institutions that aren’t always noticed. This disconnect may cause some funds to work far less efficiently than their smaller counterparts, and even underperform their competitors. Measurements have been created that can widely be applied to quantify these implicit costs.

For example, transaction cost analysis (TCA) can assess the expected market impact in a pre-trade scenario and report the realized market impact after the trade has been executed. There is also a school of analysis that measures opportunity costs incurred in unsuccessful executions caused by order cancelation and re-submission when the original implementation fails to go through.

TF: Why can’t the portfolio manager simply either a) give his head trader a phone call and discuss or b) use email, text or IM to keep lines of communication open when implementing an investment strategy or idea?

TG: Portfolio managers should not find many problems maintaining communication with traders. The bottom line is the quality of the ideas exchange, amid current explosive data volumes and fast-moving markets.

When encountering the growing complexity in the environment, portfolio managers and traders start to pick up tools to translate perception into numbers, measure market movements and keep track with changes. It may sound feasible when you are dealing with just a handful of names. However, as the investment portfolio and trade list grows into dozens or even hundreds and thousands, across the border and around the globe, the complexity of the alpha process goes beyond human abilities.

The transparency in the investment decisions and the precision in the execution processes affect the bottom line of a fund’s performance.

TF: The TABB Group Perspective report mentioned ‘next generation’ tools that will allow for a higher degree of integration and coordination between the investment mandate and the trading mandate. What, specifically, are we talking about here?

TG: The new generation of platform will facilitate one single strategy for investing and trading, as investment professionals can browse through the entire investment lifecycle, impose control in every decision-making step, and generate a coordinated plan for both portfolio managers (asset allocation) and traders (trade execution).

Institutions can explore investment and trading strategy integration in the context of optimal portfolio construction and best execution to streamline the investment process, broaden risk control, proactively reduce costs and ultimately maximize alpha in a much more precise manner. The transparent platform can seamlessly integrate the research data with the execution data, provide privacy with local data storage, and turn around solutions in real time.

TF: What’s it going to take for PMs and traders to adopt these tools if they haven’t really shown much interest (generally speaking) in working more closely together in the past? Isn’t desktop real estate already overcrowded with tools and apps?

TG: Institutions are keen to adopt technology that can boost their performance amid increasing competition. Portfolio managers and traders together can add value to the bottom line by unearthing the alpha missed in the strategy development phase, as long as the technology provides cutting-edge solutions for data integration, information protection, strategy optimization and quick implementation with a short learning curve.

It is especially crucial when high market volatility and low natural liquidity elevate the trading cost and present uncertainty to institutions.

Nowadays investment professionals need to consider market sentiment and liquidity conditions when managing their portfolios. Portfolio managers and traders are under unprecedented pressure to work more closely together, and the demand for an integrated investing and trading strategy to better leverage in-house systems for research, order and execution and further enhance efficiency cannot be ignored.

TF: Thanks Tony.