Trading Insights: Evolution of the markets structuring business

When we talk about what drives us and our principles, if you will, we have three. Innovation is one. Customization at scale is another. And the third one is what we call platform interoperability. Hi, I'm Eloise Goulder, head of the Data Assets and Alpha Group here at J.P. Morgan. And today I'm so pleased to be joined by Rui Fernandes, Global Head of Markets Trading Structuring here at J.P. Morgan to discuss the evolution of the trading and the structuring business and where it could go from here. So, Rui, thank you so much for joining us here today. Thank you for having me. Well, Rui, could you start by introducing yourself and your background? Sure. So I've been at J.P. Morgan coming up to 18 years, always in a structuring capacity. I started running our fund derivative structuring business as part of the equities division, and I grew over time to include more asset classes in more regions. Today, I'm fortunate to run the global structuring team across equities and fixed income. It's a team of about 140 people spread between London, New York, Paris, Hong Kong, Tokyo, Singapore and Mumbai. I started out as an aspiring academic. So I did a PhD in economics, very driven by research and intellectual curiosity. But then I realised that really my heart was more on the commercial side and the business side of finance. And I moved to banking after my PhD. Fantastic. And the structuring function you're referring to, can you really articulate what it does and what it means to be a structuring business? So, you know, the word structuring and what structuring actually means has evolved over time. So structuring today really means trying to deliver a very specific, customised risk profile delivery mechanism to a client in a non-flow way, i.e. not a flow instrument or flow trader, but rather something that is customised for the client, understanding the risk profile, but also the nature of the client. So the needs and the way in which a corporate or a hedge fund or an asset manager or an insurance company wants to interact with J.P. Morgan and the way in which they want a product or solution to be delivered to them varies greatly from an accounting perspective, regulatory capital, tax. So understanding that client dimension is also critical to what we do. And we try to bring the firm together both from an asset class specialisation, equities, credit, rates, FX, et cetera, emerging markets, but also on a cross market basis in addressing the needs of specific clients, for example, insurance, pensions or FIC banks or FIC clients more broadly. And I'm intrigued as to the drivers of the growth of the structuring business. You're mentioning here that you're providing customised bespoke solutions. And when I think about the evolution of the trading function, I think about e-trading and I think about systematising things, standardising things. Why would you argue that this customised bespoke function within structuring cross-asset has really grown over time? So it's a good question and it has grown both at J.P. Morgan and across the street. But I think the growth has really been driven by what I think is a growing realisation internally and by clients as well in what we call the bifurcation of markets, in the sense that you have a trend towards electronification of markets. Big trend. We are ourselves a leader in that trend. We deploy a lot of intellectual capital, technology, infrastructure to be the most relevant bank in that space. And with automation and electronification of markets, that really comes with standardisation because that is the way to achieve liquidity. Because the more standardised instruments you have, the more you can channel liquidity towards those assets. So therefore, the tighter bid offer, more liquidity for clients. So that's one trend. The other side of the barbell is to try to achieve the holy grail of, at the same time, delivering a customised exposure to a client. So say, for example, I want equity exposure. Why don't I just buy the S&P? I'll just buy an S&P Future, buy an S&P ETF. Okay, that's one way to do it. Extremely liquid, low fee. But then clients may turn around and say, but actually, I want S&P, but I want to overweight this sector versus that sector, where I want to take out these 10 stocks that I don't like. So then you're into a space which we call custom baskets. So you're now creating a customised exposure to a client. When I'm giving you a very simple example, but think of that on a global scale, cross-asset across all the products that JP Morgan offers. And coming back to my example of S&P versus a custom basket, the way that a typical client would assess the merits of that, clearly on one hand, if you just go long S&P, or short for that matter, you have a very liquid, cheap, ultimately, way of expressing that view. But then on the other hand, you may want a customised view that's in a way for you to generate alpha. But then at what cost does that come? Cost in terms of bid offer, liquidity. So the whole thing we're trying to achieve is where you can customise, but the cost of customisation is low. If it's easy to customise for clients, we find that they will customise and they will value the ability to customise if it's done at the right liquidity and ultimately the right price for them. That's really fascinating, the fact that you are providing this customisation at scale. And so helpful to hear you articulating this barbell. So as e-trading and standardisation, on the one hand, has grown over the years, at the same time, this need for a customised, but customisation at scale solution has also expanded. Thinking about the client base, I assume that has also changed over time and that you're really working to satisfy the needs of the ever-evolving clients. How has that changed over time? So it has changed, but I wouldn't say it has fundamentally changed. I think some trends have clearly emerged. So clearly the rise of private credit, the commingling of insurance and sponsors, and how a lot of the big private credit, private equity sponsors either own insurance companies or have partnerships with insurance companies. I think that has been a big trend in terms of how do we service those clients in terms of liability management, asset transformation, to match the liabilities that they're acquiring. So positioning our products and solutions in a way that is relevant for clients has been very important. Another one has been the growing access and the growing interest of ultimately retail investors to access sophisticated products. By sophisticated, I mean somewhat bespoke or customised for them. And that's been very true over the last few years, where with interest rates going up, now of course they're coming down, but from 2022 to 2024, there was a lot of interest from clients on diversifying from equities and interest rate products and credit products in the retail channels have been very popular. They've grown in volume. So we've been very active in that. Another big trend on the asset management side has been the growth of, let's say, multi-strategy type investing. And I guess your audience will probably all know about the big multi-strategy hedge funds and the pod structures and how that has really grown tremendously over time. I think that's a well-known phenomenon, but I think it's also not just specific to the hedge fund community. It cuts across other investors from traditional asset managers to how insurance companies manage their balance sheets or assets, sovereign wealth funds, family offices. So broadly speaking, investors taking a more multi-asset approach. So how do we adapt ourselves to that? How do we service that community? And a lot of that comes from having relevant IP, so trade ideas that are relevant, that are implementable, either in derivative space or cash space. So we work a lot with our research department and your team, bringing, let's say, market views into an implementable structure or product that expresses that view. And that's both not just modeling and pricing, but also working with our trading colleagues to make sure we can risk manage and then provide ultimately an attractive product to a client. The multi-strat approach has also given rise to what we call quantitative investment strategies, QIS for short. And it's really systematic trading strategies that we create on a cross-asset basis that we deliver for clients. But it's always evolving because the needs of clients keep evolving. The importance of being cross-asset, being able to offer multi-strat client the ability. A good example in 23 of clients wanting to invest in commodities as an asset class and to diversify from other asset classes where perhaps they had stronger conviction. So all of that, for example, is a big theme. And again, coming back to your question, is very much driven by the rise of multi-strat and multi-asset investing across the overall investment community. Absolutely fascinating. All of those developments among our client bases, from the rise in private credit to the rise of the retail investor to the rise in the multi-strat, multi-asset community. And it's worth noting that we had Deepak Maharaj, who's in your business, Rui, who heads equities and cross-asset QIS structuring on this podcast series back in November. And I do think it's fascinating hearing about all of the ways that you are leveraging data sources, whether that's internal proprietary data sources or external data sources to formulate alpha generating ideas to make available to our client base. And that's been a big trend because, again, sticking to the area of multi-asset and multi-strat, how can we add most value to those clients? And what we try to do specifically in the QIS space is to bring a blend of intellectual property. We have strategies that we think work for certain market conditions, but very often we can have our quants and our product development people come up with really interesting strategies. But the reality then is, can we actually execute in an operationally robust way? So, for example, imagine strategies that rebalance large volumes, multiple markets, intraday based on tick data with options-based strategies with intraday delta hedging, just as an example. We can design a strategy that on paper looks great, that clients like, but can we actually execute internally, given our own trading systems, in a robust way to deliver that strategy to a client, but also at a cost, i.e. with embedded bid-offer charges that actually make sense to the client. So that we're optimizing the IP generation with the execution capability and cost associated with that. And bear in mind that in certain markets, the range of instruments that we can use to express a QIS view has also widened dramatically. ETFs being an example of that. So in the credit space, with the rise of credit ETFs and the liquidity of credit ETFs, we can do a lot of interesting strategies in credit space using ETFs as building blocks in a way that really five years ago we couldn't do. Another example in credit is the rise of portfolio trading, where for years people have been talking about factor investing being a big thing in equities. What's the analog of that in credit? Is there such a thing? And the reality is that even if conceptually we could argue there is, you got to think about the ratio of transaction costs to implement it versus the potential outperformance that you get versus a standard credit benchmark. And unless bid offers compressed, which they have under portfolio trading, you couldn't really implement a factor investing in credit. Well, that's also changing. So these are just some examples where there is ultimately a blend between idea generation as well as technology, liquidity, infrastructure development. And it's a blend of both that allows us to deliver products for clients. Well, I wanted to ask what you really believe has been key to your success in growing the structuring business over all of these years. And I think what you just articulated in terms of your ability to leverage the full cross-asset trading platform that is J.P. Morgan, is that one of the key pillars to your success? And what would you say more generally has really led to your success within the business? Thank you for that. I would say a number of things. So one, taking the good bits of J.P. Morgan scale, completeness, breadth, but at the same time, make sure that we can deliver products and solutions in a fast way for clients. Because often what we hear in anything which is bespoke is, well, how long is it going to take to produce a term sheet or documentation? So if we think that there is a trend in the market, if we think that there is a solution that a client needs, we have to be very disciplined in going from concept to an actual implementable transaction. And that can often be amazing at J.P. Morgan when you have all the building blocks that I think very few others have. But at the same time, sometimes these building blocks don't necessarily talk to each other in terms of typically technology and infrastructure modeling, et cetera. So we have to cut through that. And that means a single-minded determination to be able to go from innovation to product in a very short time span because trends are fast moving and we have to be very relevant for clients. So that's one thing that we pride ourselves in at least trying to do. And I think generally we achieve that. I think the other thing is to really think that at the end of the day, this is also driven by innovation. And sometimes I get asked, like, what do we mean by innovation? And does innovation mean complexity? And the reality is that I often joke, actually, we innovate to simplify, meaning we try to innovate where it's very bespoke, but it's a product that is ultimately delivered in a way that is easily understandable, digestible by clients. And that's something we are very conscious of. Very often the best ideas come from the client, from the client dialogue. And being able to embrace that and converge from a bunch of ideas and innovation into a well-understood set of products, I think is very important. And I think then it's a function of the skill set and the breadth of talent that we have, which in a large organization like J.P. Morgan and our structuring organization, it really spans anywhere from a financial engineer that can model complex derivatives to someone with a legal background, a trained lawyer who can go through 200 pages of legal documents and negotiate clauses and terms with clients. So it's a very broad range of skill sets. So how do you make that all run? How do you make that team have a purpose, have, if you're a North Star within the firm, I think that's ultimately been a key driver of our success. And this idea that you're piecing together the building blocks of the various businesses, we have CrossAsset here at J.P. Morgan, doing something that wasn't done before and piecing it together technologically. I mean, that's incredible. And I can understand your point about innovating to simplify so that there can be consistency CrossAsset. Yeah, absolutely. And I think one of the pillars of our business when we talk about what drives us and our principles, if you will, we have three. Innovation is one. Customization at scale is another. And the third one, which we touched upon, but haven't really gone into, is what we call platform interoperability. Now that's a little bit of a mouthful. So what does it mean, platform interoperability? It comes back to the point that at a firm like J.P. Morgan, we have really all the building blocks that we could possibly need. We have risk appetite. We have platforms from SPVs to funds, to notes, to OTC derivatives, to loan structures, to fiduciary notes, a plethora of delivery mechanisms on a global basis. But very often, these platforms are built somewhat organically to achieve a desired outcome for a particular business or subset of businesses. It just happens that over time, you kind of create silos where theoretically you think, I can mix and match any risk profile with any platform anywhere in the market business that I can deliver to any client on a global basis. And the practicality of that can be quite challenging. So a lot of what we've done over the years was to either make sure we build platforms in a way that are from the outset, markets-wide platforms, or to try to make sure that all these different platforms connect so that when a client comes and wants to mix and match, if you will, different aspects of our business from payoff to platform to legal regime, etc., we can effectively do that. So that is the third pillar. That's what I mean by platform interoperability. That's really helpful. Thank you, Rui. So final question before we wrap up, thinking about the future. You've discussed at length the evolution of your business and the trading business as a whole. And all of the changes that we've witnessed, including changes among our client base and the rise of the retail investor and the rise of ETFs. When you look to the future, let's call it five years, where do you see the business going? Is it more of the same? Or are there other factors that you think will be at play? And AI, we haven't even mentioned that in this conversation. We could not end this conversation without mentioning AI. So I'm glad you did. Yes. So what's your vision of the future, Rui? So first of all, I would always say I'm just a structure. I don't have a crystal ball. But I try to have high awareness to what are the emerging trends that we need to be ready for. So do I have a strong view of what the world will look like in five years? Broadly speaking, I don't, to be perfectly honest, because a lot can depend on changing regulation, can depend on market structure. And some of this can happen reasonably quickly. So to me, what's really important is rather than trying to predict the future, is to make sure that you are every day being alert to what the trends may be. And the best way to do that is to talk to our clients, trying to understand how they view the world and how we need to be ready to address those trends when they come. If I take AI, so that's, of course, the big elephant in the room, if you will. And we've embraced AI, obviously, as a firm. JP Morgan is well publicized. You could also argue we're kind of just scratching the surface. So we've done a lot of work on, as a firm, in trying to optimize our own internal processes. We've recently tried to embed AI into the design of products. And that was kind of a Rubicon, if you would. We had to think a lot about how do we embed AI into a product construction that is well understood by clients, but at the same time is actual AI has meaningful impact into how the product is constructed and actually makes sense in terms of the return that the client gets. So all of that, we spent a lot of time getting there. It was quite an interesting exercise, but it did set the scene for us to think more broadly about how do we bring AI signals to create quantitative investment strategies. For example, we launched a product that was widely publicized at the time called Index GPT, but that's really the start of a thinking process for us in embedding AI into our product design. I do believe it's a promising area. And if you think about what we were talking earlier about customization at scale, you'd naturally think that an AI-powered customization engine must have legs. So how do you do that? There's a lot of work to get to that, but I think that's the future. More broadly in terms of market trends, I do think that the trend of public and private markets and how that frontier will settle and how insurance balance sheets come into that private markets versus public markets, not just in credit, but also in equities and other asset classes arguably, and how us as a provider of solutions, be it capital solutions, financing solutions to that ecosystem, how we remain relevant, frankly, and how we adapt to those trends. I think that's an important area. And then we touched upon it already, but let's say the growth of listed products like ETFs and the channeling of liquidity towards ETFs. And if that is a trend that will continue, which I personally think it will be, how do we embrace that? Whether we can construct products based on ETFs for our clients, we can create our own ETFs in a way that is relevant for clients. How do we do all of that will continue to be a big trend. Well, there's so much to watch, but as you said at the outset, the importance of speaking to the client, listening to the client and being nimble and responding to the evolving client needs is clearly front and centre. Absolutely. So thank you so much, Rui. I mean, it's been really fascinating to take this step back and hear your perspectives on how the trading and the investment management business as a whole has evolved and how structuring is such a critical part of the picture now. And many of the drivers you've spoken about tie into themes that we often discuss on this podcast series, the rise of the retail investor, tracking the retail investor and social sentiment by social media, and the evolution of alpha signals and how you're packaging in this customisation at scale, various alpha signals in your QIS products, for example. So, Rui, thank you so much for taking the time to come and speak with us here today. Thank you. It's been my pleasure. 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