It is Friday afternoon in the third week of March and the head of investment banking apologizes for being late onto the call with Euromoney. “I had to get a new laptop and was on the phone with IT for two and half hours.”
Well, we’ve all been there.
“At least it works now. But then I had to message all the teams,” he sighs.
And how, Euromoney wonders, are his people adjusting to the new world of working under the shadow of Covid-19?
“Well, a lot of deals are being pulled so it’s important to communicate with all our bankers. And almost everyone is working from home right now – that is, except for the fixed income and equity traders. They all still need to be at their desks, of course.”
While the biggest banks could afford secondary back up sites, very few of the asset managers or hedge funds could- Chris Jenkins, Tora
On the next Monday, bang, the City of London goes into lockdown. Markets that have been selling off sharply for most of the month melt down. Liquidity disappears even in on-the-run government bonds where it is normally possible to trade in large size at tight bid-offer spreads. Bond exchange-traded funds trade at wide discounts to net asset value.
And amid all this, now even the traders have to work from their Chelsea townhouses. Trading is high tech; that’s why they were the last ones still going into the office. Will they cope?
Banks have taken business continuity planning seriously since the terrorist attacks on the World Trade Center nearly 19 years ago. And they have invested hundreds of millions of dollars each – billions of dollars collectively – on trading infrastructure; building capacity to process high volumes with minimal delays, measured in just milliseconds between receipt of market price data and order execution.
This trading infrastructure is being tested as never before and in surprising ways.
Business continuity used to consist of teams decamping from the City of London or Manhattan to backup sites and working from those instead. In the Covid-19 pandemic people are dispersed. And this is true even in financial centres under less onerous mobility restrictions than London and New York.
Could some of the smaller market participants be managing better than the big banks?
In early April, Chris Jenkins, managing director at Tora, a provider of portfolio management, order management and trade execution systems mainly to buy-side and also some sell-side customers, shares a few insights with Euromoney.
“While the biggest banks could afford secondary back up sites, very few of the asset managers or hedge funds could,” says Jenkins. “Those based in China and Hong Kong during SARS realized that continuity planning meant traders really had to be able to work from home.”
In the years since, that may have led to different thinking about the cloud.
Twitter has recently seen many traders – like the kids who get the complete Lego castle, garage and death star sets on Christmas morning – posting pictures of their table tops at home now stacked with computer screens, just like their work stations back in Canary Wharf.
They look great. However, they may be no great shakes. “If you have to connect from your new home desktop through a virtual private network, or by logging into Citrix, back to your office-based servers and then on to the exchanges and trading venues, that brings new latency,” says Jenkins. “Now there are many roles where short delays don’t matter much, such as in back office order management and payments. But trading is a competitive game and any latency you add in can put you at a disadvantage.”
Banks may have maintained and guarded those physical server-based systems for entirely valid security reasons. But they bring a downside. In recent weeks there has been enormous volume in equity, bond, FX and derivatives markets largely heading one way. For high frequency, low latency traders this is a dream opportunity if they can just get a millisecond or two ahead of the flows.
“Asset managers and hedge funds that have moved to cloud-based systems with lighter trading front ends just need decent broadband connection and can connect straight into them from their homes and apartments,” says Jenkins. “Our client base has had to deal with the broader market challenges – and opportunities – along with the rest of the industry, but they haven’t had any problems connecting and transacting. What they can do on their laptops at home is the same as what they do in the office.”
Firms that had not previously moved to cloud-based trading systems can’t change tack now. It’s too late for that. The trading infrastructure they chose during years of low volatility is being tested. Any lessons learned can only be implemented when the pandemic has passed.
The task of migrating from in-house to cloud-based systems will likely grow exponentially in the coming years. Anton Zujev, head of business development at Fininbox, a banking software as a service provider, says: “System migrations take time and resources to perform correctly and, most importantly, seamlessly.”
It’s difficult to know if the high-frequency trading bots have been profiting from the extraordinary moves in markets. Not many people in New York or London will want to go into the office and run them. And even traders connecting the last mile from their desktops to the cloud may face constraints.
UBS analysts point out that with entire populations spending much more time at home and engaging in bandwidth-intensive activities like video streaming and gaming, stress on mobile networks is growing. Its analysts noted at the start of April: “Mobile network latency has increased recently in Mumbai and New York,” although they also note that for now at least “in London it has been relatively flat.”