From the 2008 financial crisis to the Covid pandemic, Daniel Carvalho has seen plenty of market upheaval. He has also seen first-hand how the twin challenges of sourcing liquidity and achieving best execution have become increasingly important for traders at both buy-side and sell-side institutions. In the first of a series of Q&As with Cowen’s team of veteran traders, Carvalho talks about the state of the markets and how the sum of an outsourced trading desk provider can be greater than its parts.
Q: Let’s begin with your background. You joined Cowen in 2018, but before that you worked on both the buy-side and the sell-side.
A: I started at Deutsche Bank in London, during a very volatile period, the crisis of 2007-2008. Eventually I wanted more buy-side exposure, so I moved to Geneva to work for Brevan Howard and then on to Brevan Howard Jersey, on the macro execution desk there. The skills I gained there were very similar to what’s required when you work for an outsourced trading desk provider such as Cowen. I had to support and anticipate the needs of a variety of portfolio managers. There was a broad range of portfolio managers, with different styles and different amounts of AUM. I was working with a team in order to cater for execution across a range of different products and asset classes.
Q: How would you say your prior experience has shaped your professional approach?
A: I think my experience on the desk at Brevan Howard enabled me to learn to look after and build a rapport with different portfolio managers. Each portfolio manager was unique and required a different skillset from me as a trader. This skill proves invaluable now in my role at Cowen. We have the same approach to managing our clients.
Also, from a technology point of view, I have seen how the industry has undergone a massive change. For instance, it has shifted a lot more towards automation and is always looking for efficiencies, new systems and ways to improve or outsource certain areas. For most of my career, I’ve seen firms moving from old models to new ones. So, you’re always adapting as firms make their transitions.
Q: What are some of the big changes you’ve seen and what do they mean for your clients?
A: Liquidity isn’t as prevalent as it was. There is a greater focus on searching out liquidity and the best avenues to execute. That means finding the best counterparties with the greatest access in certain markets and searching for pockets of liquidity. The focus now on best execution, it’s unprecedented, really.
The other issue is that systems have become increasingly important. We’re always looking to bolster our capabilities, whether that’s with trading or risk systems. In the past, you would have one system and that would be it. We have invested significantly in both proprietary and third-party software, which all work together to provide both a better overall outcome, and also a better experience for the portfolio manager.
Q: You trade multiple asset classes. Are there any you focus on most?
A: I don’t tend to focus on just one. Working at Brevan, I concentrated on the macro side. That involved FX, futures and government bonds, as well as OTC products. It was very diverse. Since joining Cowen, I’ve done a lot more single-name equity trading.
The good thing about the trading team we have here is that there is a really diverse range of backgrounds. Some people have more buy-side experience and some more sell-side experience. The team members have different areas of expertise and we work with each other to combine them in order to best serve clients.
Q: Looking at market conditions now, equity markets are doing well, interest rates are at historical lows and yet there is talk of inflation returning. In terms of navigating market conditions, are there any advantages to outsourced trading versus in-house?
A: These are very exciting times. We’re seeing some big shifts in inflation expectations, which some say could have a significant impact on markets over the next few years. We obviously monitor market trends and flows. For each client, we know what their interests are, such as whether they are interested in value investing or growth. We keep them up to date with anything in their particular areas and provide as much colour as possible. We deliver a tailored service to the portfolio manager.
We have a broad range of clients, so we get to see both sides. For instance, there’s a battle between growth, which has had an amazing run, versus value, which has had a tough time but is making a comeback. How that plays out will have a huge impact on macro trends. So, we’re always listening and giving our clients the benefit of what we see and hear.
Q: How has the pandemic affected your firm’s ability to serve your clients?
A: When the pandemic hit, it was an extremely worrying time. But we managed the shift from the office to working remotely quite seamlessly. In terms of providing a service, there was no interruption in allowing clients to manage their risk during a very volatile time.
But there were also significant dislocations and opportunities for active managers. We have seen an increase in the number of clients and in their activity since then. Our focus has always been on trying to deliver the best result for the clients. This has not changed as a result of the pandemic.
There have been huge swings. From a risk management perspective, we’ve had to work with different owners, across different styles. It’s highlighted that our infrastructure has proven to be robust and resilient. So, I would say we’ve been able to navigate these markets well.
Q: Cowen has been expanding in terms of asset classes and increasing its presence in Europe and Asia. Meanwhile, industry data suggest that interest in multi-asset class trading is continuing to soar. Are you seeing evidence of that on your side?
A: Absolutely. Certain asset classes sometimes are at the forefront. The benchmark asset class for outsourced trading has been equities historically, but the focus has been shifting recently. We are certainly trading ‘orders of magnitude’ more derivatives and fixed income products compared to 12 months ago. Exchange traded crypto currency flow has also been at the fore this year especially. Having broad access to different parts of the market is key.
Q: Last question: What was the most recent nice thing a client said to you?
A: Today a client was inquiring about the amount of stock borrow available on a particular name, to see how expensive it was to short and to get a sense of the availability of the shares. There are a few standard checks you can do, which I did, but then we went a step further and investigated the short interest colour and history as well as client type. This can take time. It’s going the extra mile, but if a client has asked us for something, we try to see how we can go one step further and provide more value. So, this particular client was very appreciative.
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